Case Details: Smt. D. Bhagya Laxmi vs. Union of India [2025] 181 taxmann.com 329 (HC - Calcutta)

Judiciary and Counsel Details

• Sujoy Paul, ACJ.
•  Partha Sarathi Sen, J.
• Ujjal Ray, Arpa Chakraborty & Binit Kumar, Advs. for the Petitioner.
• Ram Chandra Agarwal, Adv. for the Respondent.

Facts of the Case

In the instant case, the petitioner was the widow of a deceased railway employee who died while in occupation of a Type IV government quarter. The petitioner did not vacate railway accommodation within the permissible period and, therefore, the department adjusted about Rs. 10 lakhs from Death-cum-Retirement Gratuity on account of overstay.

The petitioner challenged the said recovery before the Tribunal, which was rejected. Thereafter, an appeal was made before the High Court.
It was noted that Rule 16 of the Railway Services (Pension) Rules, 1993, is clearly applicable for the purpose of deduction of the amount of gratuity because of over retention of government accommodation.

Further, the Public Premises (Eviction of Unauthorised Occupants) Act, 1971, a proceeding which was initiated by the department, was only in relation to the eviction of an unauthorised occupant/petitioner, and when the petitioner received notice, she vacated the accommodation and thus, the proceeding became infructuous and was not required to be taken to its logical end.

High Court Held

The High Court held that the petitioner had not raised any ‘dispute’ about the quantification of amount of penal rent and, therefore, quantification of the amount did not fall within the ambit of ‘dispute’ as per clause (e) of sub-rule 8 of Rule 16 and the Public Premises (Eviction of Unauthorized Occupants) Act, 1971, was not attracted. Therefore, the Railway Administration had rightly deducted the amount from the gratuity of the deceased railway employee’s widow.

List of Cases Reviewed

• Order of Central Administrative Tribunal in O.A. No.350/2089/2021, dated 31.08.2023 (para 14) affirmed
• Union of India v. Gurtiboina appaia V. G. Shankar [W.P.C.T. No.140 of 2019, dated 17-11-2021] (para 12) distinguished

List of Cases Referred to

• Union of India v. Gurtiboina appaia V. G. Shankar [W.P.C.T. No.140 of 2019, dated 17-11-2021] (para 4)
• Secretary, ONGC Ltd. v. V. U. Warrier (2005) 5 SCC 245 (para 5).

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Case Details: Aurobindo Pharma Ltd. vs. State of Telangana [2025] 181 taxmann.com 704 (Telangana)

Judiciary and Counsel Details

• Aparesh Kumar Singh, CJ.
• G.M. Mohiuddin, J.

Facts of the Case

The petitioner challenged the rejection of its refund claims for accumulated unutilized credit of compensation cess paid on inputs, specifically coal, used in the manufacture of goods for export. The Department of Revenue denied the refund on the ground that the goods manufactured were non-taxable supplies and, therefore, the refund was not admissible. The petitioner submitted that the refund of the accumulated input tax credit of compensation cess should be allowed under the applicable provisions. The matter was accordingly placed before the High Court.

High Court Held

The High Court held that the refund of accumulated unutilized credit of compensation cess on inputs used in the manufacture of goods for export is admissible. The Court observed that the goods manufactured were exempt from tax, and the refund provisions under the CGST Act apply mutatis mutandis to the Compensation Cess Act. Consequently, the impugned orders were set aside, and the matter was remanded to the original authority to take a fresh decision in accordance with the Section 54 of the CGST Act/Telangana GST Act.

List of Cases Reviewed

• Patson Papers (P.) Ltd. v. UOI [2025] 174 taxmann.com 6 (Gujarat) (Para 10) followed

List of Cases Referred to

• Patson Papers (P.) Ltd. v. UOI [2025] 174 taxmann.com 6 (Gujarat) (para 9)
• Atul Ltd. v. UOI [2025] 176 taxmann.com 946/101 GSTL 376 (Gujarat) (para 9).

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Quirky governance refers to unconventional mechanisms that influence corporate behaviour and market discipline outside traditional governance structures. It includes practices such as insider trading and whistle-blowing, which arise from information asymmetry within corporations. While insider trading reflects the misuse of unpublished price-sensitive information for personal gain, whistle-blowing involves the disclosure of illegal, unethical or improper conduct in the public interest. Together, these mechanisms highlight how information, incentives and individual actions can impact corporate accountability, investor confidence and the overall integrity of capital markets, even though they operate beyond formal board-driven governance frameworks.

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1. Introduction

Every corporate has a number of stakeholders and some of them have better access to valuable non-public information than others which they can use to their advantage. Examples of two such important instances are – first, when some people trade on the basis of price sensitive non-public information (insider trading) and second, when someone makes public information, especially negative, about corporate conduct and corporate performance (whistle blowing). Macey (2008) has labelled these two along with short selling as quirky governance.

2. Insider Trading

2.1 Meaning

Insider trading is transacting in securities of the company by an insider on the basis of unpublished price sensitive information (UPSI).

Key definitions as per SEBI (Prohibition of Insider Trading) Regulations, 2015:

• Insider – A “connected person” or a person possessing or having access to unpublished price sensitive information;
• Connected Person – One who has been associated with the company in any capacity such as a director, officer or employee or in a contractual or fiduciary relationship with the company; and includes a list of “deemed connected persons”;
• Unpublished Price Sensitive Information (UPSI) – Any information relating to securities of a company that is not generally available, and, upon being available, is likely to materially affect the price of the company’s securities. It includes matters such as financial results, dividends, changes in capital structure, significant corporate transactions and changes in key managerial personnel.

2.2 Legal Position

Insider Trading in India is an offence on the basis of non-public price sensitive information according to SEBI (Prohibition of Insider Trading) Regulations, 2015.¹

2.3 Rationale for Insider Trading Regulations

Most of the countries in the world prohibit insider trading in some form or the other. Some of the important reasons for doing it are as follows:

(i) Preserving capital market efficiency – Efficient capital markets are essential for encouraging investors to invest in securities. In an efficient market information, all the market participants should be able to access information equally. Insider trading results in distortions in capital markets as some participants have superior information than others.

(ii) Undermines investor confidence – Insider trading results in an unexplained and sudden increase or decrease in prices of the securities. Such unjustified volatility in prices undermines investors’ confidence in the company.

(iii) Against good corporate governance practices – Insider trading is unfair as it enriches few at the cost of wider stakeholders. Transparency and business ethics are also sacrificed. High standards of corporate governance cannot be, therefore, attained.

2.4 SEBI (Prohibition of Insider Trading) Regulations, 2015

The Securities and Exchange Board of India (SEBI) has notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 on 15th January, 2015. These supersede the Regulations related to Insider Trading in 1992 by SEBI. The new Regulations are stricter and have imposed huge penalties for non-compliance and contravention. Some of the important provisions of these Regulations are

(i) Role of Compliance Officer – The major responsibility for monitoring and implementing the Codes of Conduct is upon the Compliance Officer.

(ii) Prohibition on the exercise of ESOPs – Designated persons have been prohibited to exercise ESOPs during six months after sale of shares.

(iii) Threshold limit for Disclosures – Certain persons, as specified under Regulations, on crossing the set limit of value of the securities traded in a certain period shall disclose it to the Compliance Officer.

(iv) Formulation of a trading plan by an insider² – The concept of a trading plan allows insiders to trade in compliance with the regulations without violating the prohibitions imposed. A ‘trading plan’ refers to a plan framed by an insider for trades to be executed at a future date. It is particularly suitable for individuals within an organization who may, by way of their position, seniority, or any other reason, be in possession of UPSI at all times. Since the Regulations prohibit trading when in possession of UPSI, trading plans serve as an exemption to such prohibition. An insider can formulate a trading plan and present it to the compliance officer for approval and public disclosure. Based on the approved plan, trades may be carried out on behalf of the insider. The time gap for the commencement of trading from the date of public disclosure of the trading plan is 120 calendar days. The compliance officer must approve or reject the plan within two trading days of receipt.

(v) Maintenance of disclosures – The disclosures made under these regulations shall be maintained by the company for a minimum period of eight years in a structured digital database. In this database, records about the persons who possess UPSI are kept. The data on SDD must be managed with a trusted database software instead of using software such as MS Word, MS Excel, MS PowerPoint, where the data can be edited.

(vi) Formulation of Whistle Blower Policy – Regulations created an obligation on listed companies to formulate a Whistle-Blower Policy. In 2019, SEBI introduced a mechanism for informants to file complaints directly with it. In 2021, SEBI raised the compensation for whistle-blowers in insider trading cases to ₹10 crore from ₹1 crore.

These new Regulations have been issued by SEBI to ensure a level playing field in the securities market for all the investors and to safeguard their interest as well.

3. Whistle Blowing

3.1 Introduction

The act of an insider making public acts of corruption, illegal practices, and other forms of unethical behaviour by organisations is common throughout the World. For such acts, U.S. civic activist Ralph Nader, gave the term whistle blowing in 1970’s and such insiders are called whistle-blowers. The scope of the term has become wider over the years. Since 1990’s, the act of an employee raising these concerns internally outside the normal chain of command are also being termed as whistle blowing.

3.2 Definition

According to Vandekerckhove (2006),

“A whistle-blower is a person who exposes any kind of information or activity that is deemed illegal, unethical, or not correct within an organization that is either private or public.”

Important features of whistle-blowing, on the basis of above definition, are as follows:

(i) A whistle-blower can be an employee or a former employee or any other person in a contractual relationship with a company.

(ii) He makes public wrongful acts/information to the outside world or internally outside the usual hierarchical line.

(iii) He reports these acts to someone who is in a position to take action or has an authority to do so.

(iv) Whistle blowing can happen in public or private organisations.

3.3 Types of Whistle-Blowing

Whistle blowing can be classified on the basis of:

3.3.1 External Whistle-Blowing and Internal Whistle-Blowing

(a) If the whistle-blower reports misconduct to a person outside the organisation, such as regulatory agency or the media, it is termed as external whistle-blowing. Internal whistle-blowing is a situation when a whistle-blower reports misconduct to another person within the organisation but outside the usual line of command.

One of the famous external whistleblowers is Erin Brockovich, a legal clerk and environmental advocate who gained recognition for uncovering the contamination of groundwater in Hinkley, California, by Pacific Gas & Electric (PG&E). The contaminant was hexavalent chromium, a harmful chemical linked to severe health issues in the community. In the 1990s, Brockovich spearheaded efforts to investigate the issue, bringing to light PG&E’s responsibility for pollution. Her work played a key role in securing a $333 million settlement for the affected residents, one of the largest environmental settlements in U.S. history, and raised awareness about corporate environmental misconduct. Cynthia Coppers, who blew the lid off WorldCom Scam, was an employee of the company and is an example of an internal whistle blower.

(b) From a corporate’s point of view both types reflect whistle-blower’s disillusionment with and distrust of the system. However, the damage to reputation of the entity done by external whistle blowing is much more than the latter. It may result in heavy fines and penalties imposed by regulatory authorities.

Types of Whistle-blowing

3.3.2 Open Whistle-Blowing and Anonymous Whistle-Blowing

(a) When whistle-blower reveal his identity as he conveys the information, it is said to be open whistle-blowing and if identity is concealed, it is termed as anonymous whistle-blowing. The main advantage with open whistle-blowing is that the security can be provided to such a person and he/she can be contacted for further information.

(b) In many situations, open whistle blowers have been hugely rewarded in terms of money and, thus, the real motive behind whistle-blowing by such remains doubtful. Anonymous whistle blowing may not be taken seriously by the regulators or the organization and burden of protection of whistle-blower is also not there.

3.4 Pros and Cons of Whistle-Blowing

Whistle-blowing can be a rewarding experience for some whistle-blowers. But others may have to face a backlash or mistrust of others:

3.4.1 Pros of Whistle-Blowing

(a) Financial Compensation – Many times, whistle-blower law/policy has a provision of rewarding the whistle-blower financially. For example, whistle-blowers in the US are, generally, entitled to a part of a settlement collected by the Government. Dinesh Thakur, the whistle-blower who helped the US Government show systemic product-testing failures at Ranbaxy and which led to the $500 million settlement in 2013, received $48 million. In US, the Dodd-Frank Act offers financial rewards for whistleblowers who expose securities fraud.

(b) Legal Protection – Many people face retaliation when they become a whistle-blower. Organisational policies and laws can protect them from adverse consequences. To take an example, in India Whistle Blowers Protection Act, 2014 seeks to protect whistle blower who has made a public interest disclosure related to an act of corruption, misuse of power, or criminal offense by a public servant.

(c) Reduces Risk – One of the main reasons to blow the whistle on any illegal or unethical activity is to protect colleagues and other stakeholders or public at large from certain risks. Whistle-blowing acts as a safeguard.

(d) Ethical Responsibility – Whistle-blower may have been pushed to do so by his sense of right and wrong. For example, Sherron Watkins, the former Vice-President of Enron Corporation in US and whistle-blower alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company. She testified before Congressional Committees from the House and Senate investigating Enron’s demise.

3.4.2 Cons of Whistle-blowing

(a) Retaliation – Whistle-blower may have to face potential retaliation from management, colleagues or even Government. The case of Edward Snowden is an example of a backlash. He leaked details of several top-secret United States mass surveillance programs to the media and was forced to flee the country and seek asylum in Russia to escape prosecution by the US Government. In June 2024, the outgoing CEO of Boeing Dave Calhoun accepted at a Senate hearing in US that Boeing is trying to protect whistle-blowers at his company but still they have faced retaliation.³

(b) Conflict of Interest – Many whistle-blowers face an ethical dilemma – whether to protect the short-term interest of colleagues and the organisation or to protect the public at large; whether to be disloyal, whether to protect short-term interest of the shareholders or caution future investors. Cynthia Cooper, while serving as Vice President of Internal Audit at WorldCom, played a pivotal role in exposing what was, at the time, the largest case of corporate fraud too faced an ethical dilemma. Recalling the time, she was contemplating exposure she said in a talk, “There were times when I was scared to death. I remember my hands shaking.”⁴ She knew after the exposure; thousands of employees would lose their jobs and retirement savings. Mississippi, where WorldCom was based, would also lose millions in revenue. Despite being sure that she was right, Cooper struggled with depression and found it difficult to move forward from the scandal even after disclosure, as the fallout affected not just the company, but also her own personal and professional life.

3.5 Advantages of a Good Whistle-Blower Policy to an Organisation

The revelation made by the whistle-blower should be handled promptly by the organisation. Many large-scale corporate frauds have come to light through internal whistle-blowing. To ensure transparency and continuous trust and support from all the stakeholders, it is imperative for every organisation to lay down a clear and comprehensive whistle blowing policy. Some of the advantages that may accrue to it by such a policy are listed below:

Advantages of Whistle-Blower Policy

3.6 Whistle-Blowing Laws in India

Regulations in India have been laid down relating to whistle-blowing and protection of whistle-blowers. The Companies Act, 2013 and SEBI’s Listing Agreement Requirements have included provisions related to whistle-blowing/ vigil mechanism. The Indian Parliament has also passed Whistle-blowers Protection Act, 2014.

3.6.1 The Companies Act, 2013 and Whistle-Blowing

The Companies Act, 2013, has been framed in the backdrop of various corporate scandals. It prescribes stricter compliance, vigil and disclosure norms than laid by previous Companies Acts. Some examples are as below:

Section 177(9) and 177(10) read with Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 and Schedule IV provides for requirements of Vigil Mechanism as under:

(a) Establishment of Vigil mechanism

• Every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances:

1. 1. the companies which accept deposits from the public:
   2. the companies which have borrowed money from banks and public financial institutions more than fifty crore rupees

• It may be noted that while section 177(9) of the Act mandates to establish vigil mechanism for directors and employees to report genuine concerns, in case of a listed company, such mechanism is available to all stakeholders.

(b) Overseeing of vigil mechanism:

• The companies which are required to constitute an Audit Committee shall oversee the vigil mechanism through the committee and if any of the members of the Committee have a conflict of interest in each case, they should recuse themselves and the others on the committee would deal with the matter on hand.
• In case of other companies, the Board of Directors shall nominate a director to play the role of audit committee for the purpose of mechanism to whom other directors and employees may represent concerns.

(c)  Safeguard against victimisation and direct access:

• Policy against victimisation of employees and directors who avail of the mechanism should be laid.
• Provide for direct access to the chairperson of the Audit Committee or the director nominated to play the role committee in exceptional cases.

(d) Disclosure

The company must disclose details of the mechanism on its website and in the Board’s report.

(e) Safeguard against frivolous complaints:

• In case of repeated frivolous complaints being filed by a director or an employee, the Audit Committee or the director nominated to play the role of Audit Committee may take suitable action against concerned director or employee including reprimand.

(f) Role of independent directors – Schedule IV: Code for Independent Directors:

• Ascertain and ensure that the company has an adequate and functional vigil mechanism.
• Ensure that interests of a person who uses the mechanisms are not affected.

3.6.2 SEBI and Whistle-Blowing

• EBI has introduced the concept of whistleblowing by adding Chapter IIIA to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). This enables whistleblowers to report insider trading violations directly to SEBI, circumventing the internal reporting mechanisms of companies. The goal is to externalise the reporting process, thereby enhancing the security and anonymity of whistleblowers, which is expected to lead to an increase in reported violations.
• Additionally, SEBI has announced financial rewards to further encourage whistleblowing. SEBI retains the sole discretion to declare an informant eligible for a reward and will notify the informant or their legal representative to file an application in the specified format to claim the reward. The reward is set at 10% of the monetary sanctions, capped at INR 10 crores, or a higher amount as may be specified by SEBI from time to time

3.6.3 Whistle-Blowers Protection Act, 2014

On May 14, 2014, the Whistle-Blowers Protection Act, 2014 received Presidential assent. The salient features of this Act are:

(a) The Act seeks to protect persons making a public interest disclosure (whistle-blowers) related to an act of corruption, misuse of power, or criminal offence by a public servant.

(b) The Central Vigilance Commission (CVC) is empowered to receive complaints, assess public disclosure requests, and safeguard complainants.

(c) Every complaint must include the identity of the complainant.

(d) It ensures confidentiality of the complainant and penalises any public official who reveals a complainant’s identity, without proper approval.

(e) The Act prescribes penalties for knowingly making false complaints.

The Whistle-Blower Protection Act has attempted to balance two conflicting interests—the need to protect the whistle-blowers against the need to protect public officials from unnecessary harassment.

1. Section 195 of the Companies Act, 2013 that dealt with insider trading of securities has been omitted by the Companies Amendment Act, 2017.
2. https://www.taxmann.com/post/blog/analysis-sebis-new-insider-trading-regulations-key-changes-and-implications
3. https://www.latimes.com/business/story/2024-10-08/boeing-whistleblower-lawsuit-story
4. https://www.jmu.edu/news/2013/11/14-cooper-demonstrates-power-of-choice-in-business-ethics.shtml

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CS Neha Dangayach & Sumit Patel – [2026] 182 taxmann.com 45 (Article)

1. Introduction

The Companies Act, 2013 provides a comprehensive regulatory framework designed to ensure that companies in India operate with transparency, accountability, and proper corporate governance. To enforce these principles, the Act empowers various authorities- primarily the Registrar of Companies (ROC), the Ministry of Corporate Affairs (MCA), and the Serious Fraud Investigation Office (SFIO)-to review, examine, and scrutinise the affairs of companies. While inspection functions as a preliminary compliance-checking mechanism, investigation is a deeper examination initiated only when serious violations, mismanagement, or fraudulent practices are suspected. Together, these mechanisms help maintain discipline in corporate operations and protect the interests of shareholders, creditors, and the general public.

2. Inspections and Investigation under Companies Act, 2013

Under the Companies Act, 2013, the power to initiate and conduct inspection lies primarily with the ROC, whereas the power to order a formal investigation lies with the MCA, the National Company Law Tribunal (NCLT), or SFIO depending on the nature of the case. The process typically begins when the ROC issues a notice under Section 206(1) asking a company to furnish specific information, explanations, or documents. If the ROC finds the company’s response inadequate or inconsistent, or if the information supplied raises concerns of possible wrongdoing, the ROC may escalate the matter by ordering an inspection under Section 206(4). Once an inspection is initiated, ROC officers are empowered under Section 207 to examine books of account, statutory records, agreements, registers, and other documents that relate to the company’s affairs.

After completing the inspection, the ROC prepares a detailed report under Section 208 and submits it to the Central Government. If the report reveals significant irregularities- such as mismanagement, diversion of funds, non-disclosure of liabilities, fraudulent transactions, or violations of the Act- the MCA may order a full investigation. Such an investigation may be conducted under Section 210 by inspectors appointed by the Government, under Section 212 by the SFIO in cases of serious fraud, or under Section 213 by the NCLT upon application from shareholders or complainants. Thus, inspection often acts as the first step that triggers a full-scale investigation when deeper scrutiny is required.

3. Companies Covered Under These Powers

The powers of inspection and investigation apply broadly to all companies registered under the Companies Act, irrespective of their size, nature, or structure. This includes private companies, public companies (both listed and unlisted), One Person Companies, Section 8 not-for-profit entities, and subsidiaries of foreign companies operating in India. The Act does not provide any major exemption for any class of companies from being inspected or investigated. As long as an entity is incorporated under the Act, it remains subject to regulatory oversight.

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Case Details: Mining Geological and Metallargical Institute of India, In re - [2025] 181 taxmann.com 930 (AAR - WEST BENGAL)

Judiciary and Counsel Details

• Jaydip Kumar Chakarbarti & Shafeeq S., Member
• Surendra Joshi, CA & Abhisek Maroti, AR for the Applicant

Facts of the Case

The applicant, a not-for-profit company limited by guarantee incorporated under the Companies Act, 1882, sought clarification on the applicability of GST to sponsorship services provided to recipients located in the taxable territory. It was submitted that it has never declared dividends, had no beneficial shareholders, and functions solely as a not-for-profit entity. It requested guidance on whether its sponsorship services are liable to GST on a forward charge or reverse charge basis, given its non-profit status and historical interpretation of Section 9 of the CGST Act, in light of amendments to RCM notifications. The matter was accordingly placed before the Authority for Advance Ruling (AAR).

AAR Held

The AAR held that the applicant qualifies as a ‘company’ and a ‘body corporate’ under the Companies Act, 2013. It was observed that amendments to the GST notifications specifically exclude bodies corporate from the reverse charge exemption for sponsorship services, which were earlier subject to reverse charge only when supplied by certain non-corporate entities. As a result, sponsorship services provided by the applicant to recipients located within the taxable territory are now liable to GST under the forward charge mechanism, in accordance with Section 9 of the CGST Act. Therefore, all sponsorship-related receipts are subject to GST under forward charge.

List of Cases Referred to

• Bharat Cooperative Bank v. Cooperative Bank Employees (2007) 4 SCC 685 (para 2.4)
• Queen’s Educational Society v. CIT [2015] 55 taxmann.com 255/372 ITR 699/231 Taxman 286 (SC) (para 2.5)
• Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1978] 121 ITR 1/[1979] 2 Taxman 501 (SC) (para 2.5)
• Board of Trustees, Ayurvedic & Unani Tibia College v. State of Delhi AIR 1962 SC 458 (para 2.5)
• Duli Chand v. Mahabir Pershad Trilok Chand Charitable Trust AIR 1984 Delhi 144 (para 2.5)
• Renusagar Power Co. v. General Electric Co. AIR 1988 SC 1737 (para 2.5).

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“In a joint development, profit is shared—but accountability must never be”

A Joint Development Agreement (JDA) is a contractual arrangement in which parties come together to develop real estate —typically involving grant of development rights by landowner and construction/development by the developer. The output (flats/units/revenue) is shared based on agreed ratios. JDAs require detailed accounting evaluation as they create shared risks, rights, obligations, revenue streams, and asset usage.

1. Identification of the arrangement

The initial evaluation focuses on understanding the exact nature of contributions and the commercial intent of the agreement. This includes examining whether the parties grant development rights on land, construction expertise, finance or project management. It is also necessary to analyse the area/revenue sharing mechanism and determine who controls key development decisions. Under Ind AS, this assessment determines whether the arrangement qualifies as a joint arrangement. Under the earlier AS framework, JDAs were treated mainly as contractual real estate transactions without such classification requirements.

2. Accounting of Joint Development Agreement under Accounting Standard

The accounting of joint development arrangements under the Accounting Standards (AS) requires careful assessment of the rights and obligations arising from the arrangement to ensure that the financial statements reflect its true substance. Such arrangements often involve complex considerations relating to recognition, measurement, and timing of revenue, costs, assets, and liabilities. Accordingly, application of the relevant AS and related guidance is essential to achieve consistent and transparent financial reporting. Accounting from the perspective of both land owner and developer is discussed herewith:

2.1. Accounting for the Landowner under AS

The land continues to be recognised as a fixed asset in the balance sheet, since legal ownership remained with the entity throughout the arrangement and, accordingly, no de-recognition of land is required.

Further, under construction/work-in-progress or completed flats are not recognised in the financial statements, as the responsibility for construction and related recognition rested with the developer under the terms of the agreement. Moreover, the revenue is recognised in accordance with the provisions of the development agreement, at the point when the right to receive consideration becomes reasonably certain.

2.2. Accounting for the Developer under AS

Construction costs are accumulated as work-in-progress during the development phase and, upon completion, the constructed units are recognised as stock-in-trade (inventory), with the total cost of construction and the agreed land consideration forming part of the developer’s project cost. As legal ownership of the land does not transfer to the developer, the land is not recognised as an asset in the books. Further, any payments made or revenue share payable to the landowner under the arrangement are treated as an integral component of the overall project cost.

2.3. Example to understand the accounting under Accounting Standard

Let us understand the accounting in the books of both land owner and developer through the help of an example.

The developer incurs construction costs of ₹2 crore to construct 10 flats. The allocation is made in a way that 4 flats are allocated to the landowner and 6 flats are allocated to developer. Out of the developer’s share of 6 flats, 3 flats are sold during the first year. Additionally, 4 flats are handed over to the landowner as consideration for land. The sales price is 45 lakhs per flat.

2.3.1 Books of the Developer

Balance Sheet (Developer)

Profit & Loss Account (Landowner)

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Editorial Team – [2026] 182 taxmann.com 46 (Article)

Global IDT Insights provides a weekly snippet of tax news specifically related to Indirect Taxes from around the globe.

1. UAE has issued a VAT guide on administrative exceptions

UAE has issued a VAT guide on administrative exceptions outlining the circumstances in which VAT registrants may apply for concessions permitted under the VAT Law and the Executive Regulation. The guide explains the eligibility criteria, procedural requirements, and decision-making process applicable to VAT administrative exception requests.

The guide is limited to specific administrative exceptions expressly provided under the Executive Regulation and clarifies the scope, legal framework, and status of such exceptions. It also sets out the documentation, timelines, and conditions applicable to applications submitted through EmaraTax.

Key aspects of this guide include:

(a) Limited scope of VAT administrative exceptions – VAT administrative exceptions are available only for cases explicitly provided under the Executive Regulation. These include exceptions relating to Tax Invoices, Tax Credit Notes, alternative evidence to prove export of goods, and extensions of the time period to export goods. The guide clarifies that administrative exceptions do not extend to VAT refunds, VAT registration matters, waiver of administrative penalties, or other VAT technical issues.

(b) Eligibility restricted to VAT registrants and authorised applicants – Only VAT registrants are eligible to apply for a VAT administrative exception. Applications must be submitted by an authorised signatory, an appointed Tax Agent eligible for indirect taxes, or a court-appointed legal representative. In the case of a tax group, applications must be submitted by the representative member or its appointed Tax Agent.

(c) Defined eligible cases and statutory conditions – The guide specifies eligible cases for each category of administrative exception, along with the statutory references and conditions that must be satisfied. These include demonstrating impracticality in issuing or detailing Tax Invoices or Tax Credit Notes, justifying the need for alternative export evidence, or establishing circumstances beyond the supplier’s and recipient’s control for extending export timelines. Applications falling outside these defined cases will be rejected.

(d) Clarification on documentary evidence for export of goods – The guide reflects amendments to the documentary evidence required to prove export of goods with effect from 15-11-2024. It specifies acceptable combinations of customs declarations, commercial evidence, shipping certificates, and official evidence. Where a registrant is unable to obtain the prescribed combinations, an administrative exception may be requested through EmaraTax.

(e) Administrative exception application process via EmaraTax – The guide details the end-to-end process for submitting administrative exception requests through EmaraTax, including application steps, supporting documentation, and file requirements. It also sets out timelines for submission, consequences of incomplete applications, and automated closure of requests not finalised within prescribed business days.

(f) FTA review, decision timelines, and validity period – The Federal Tax Authority may accept, request further information, or reject applications based on completeness and eligibility. The guide specifies response timelines of 25 or 45 business days, depending on the category of exception. Approved administrative exceptions are generally valid for three years, subject to earlier expiry if relevant legislative provisions are amended or repealed.

Source – Official Guidance

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Quirky governance refers to unconventional mechanisms that influence corporate behaviour and market discipline outside traditional governance structures. It includes practices such as insider trading and whistle-blowing, which arise from information asymmetry within corporations. While insider trading reflects the misuse of unpublished price-sensitive information for personal gain, whistle-blowing involves the disclosure of illegal, unethical or improper conduct in the public interest. Together, these mechanisms highlight how information, incentives and individual actions can impact corporate accountability, investor confidence and the overall integrity of capital markets, even though they operate beyond formal board-driven governance frameworks.

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1. Introduction

Every corporate has a number of stakeholders and some of them have better access to valuable non-public information than others which they can use to their advantage. Examples of two such important instances are – first, when some people trade on the basis of price sensitive non-public information (insider trading) and second, when someone makes public information, especially negative, about corporate conduct and corporate performance (whistle blowing). Macey (2008) has labelled these two along with short selling as quirky governance.

2. Insider Trading

2.1 Meaning

Insider trading is transacting in securities of the company by an insider on the basis of unpublished price sensitive information (UPSI).

Key definitions as per SEBI (Prohibition of Insider Trading) Regulations, 2015:

• Insider – A “connected person” or a person possessing or having access to unpublished price sensitive information;
• Connected Person – One who has been associated with the company in any capacity such as a director, officer or employee or in a contractual or fiduciary relationship with the company; and includes a list of “deemed connected persons”;
• Unpublished Price Sensitive Information (UPSI) – Any information relating to securities of a company that is not generally available, and, upon being available, is likely to materially affect the price of the company’s securities. It includes matters such as financial results, dividends, changes in capital structure, significant corporate transactions and changes in key managerial personnel.

2.2 Legal Position

Insider Trading in India is an offence on the basis of non-public price sensitive information according to SEBI (Prohibition of Insider Trading) Regulations, 2015.¹

2.3 Rationale for Insider Trading Regulations

Most of the countries in the world prohibit insider trading in some form or the other. Some of the important reasons for doing it are as follows:

(i) Preserving capital market efficiency – Efficient capital markets are essential for encouraging investors to invest in securities. In an efficient market information, all the market participants should be able to access information equally. Insider trading results in distortions in capital markets as some participants have superior information than others.

(ii) Undermines investor confidence – Insider trading results in an unexplained and sudden increase or decrease in prices of the securities. Such unjustified volatility in prices undermines investors’ confidence in the company.

(iii) Against good corporate governance practices – Insider trading is unfair as it enriches few at the cost of wider stakeholders. Transparency and business ethics are also sacrificed. High standards of corporate governance cannot be, therefore, attained.

2.4 SEBI (Prohibition of Insider Trading) Regulations, 2015

The Securities and Exchange Board of India (SEBI) has notified the SEBI (Prohibition of Insider Trading) Regulations, 2015 on 15th January, 2015. These supersede the Regulations related to Insider Trading in 1992 by SEBI. The new Regulations are stricter and have imposed huge penalties for non-compliance and contravention. Some of the important provisions of these Regulations are

(i) Role of Compliance Officer – The major responsibility for monitoring and implementing the Codes of Conduct is upon the Compliance Officer.

(ii) Prohibition on the exercise of ESOPs – Designated persons have been prohibited to exercise ESOPs during six months after sale of shares.

(iii) Threshold limit for Disclosures – Certain persons, as specified under Regulations, on crossing the set limit of value of the securities traded in a certain period shall disclose it to the Compliance Officer.

(iv) Formulation of a trading plan by an insider² – The concept of a trading plan allows insiders to trade in compliance with the regulations without violating the prohibitions imposed. A ‘trading plan’ refers to a plan framed by an insider for trades to be executed at a future date. It is particularly suitable for individuals within an organization who may, by way of their position, seniority, or any other reason, be in possession of UPSI at all times. Since the Regulations prohibit trading when in possession of UPSI, trading plans serve as an exemption to such prohibition. An insider can formulate a trading plan and present it to the compliance officer for approval and public disclosure. Based on the approved plan, trades may be carried out on behalf of the insider. The time gap for the commencement of trading from the date of public disclosure of the trading plan is 120 calendar days. The compliance officer must approve or reject the plan within two trading days of receipt.

(v) Maintenance of disclosures – The disclosures made under these regulations shall be maintained by the company for a minimum period of eight years in a structured digital database. In this database, records about the persons who possess UPSI are kept. The data on SDD must be managed with a trusted database software instead of using software such as MS Word, MS Excel, MS PowerPoint, where the data can be edited.

(vi) Formulation of Whistle Blower Policy – Regulations created an obligation on listed companies to formulate a Whistle-Blower Policy. In 2019, SEBI introduced a mechanism for informants to file complaints directly with it. In 2021, SEBI raised the compensation for whistle-blowers in insider trading cases to ₹10 crore from ₹1 crore.

These new Regulations have been issued by SEBI to ensure a level playing field in the securities market for all the investors and to safeguard their interest as well.

3. Whistle Blowing

3.1 Introduction

The act of an insider making public acts of corruption, illegal practices, and other forms of unethical behaviour by organisations is common throughout the World. For such acts, U.S. civic activist Ralph Nader, gave the term whistle blowing in 1970’s and such insiders are called whistle-blowers. The scope of the term has become wider over the years. Since 1990’s, the act of an employee raising these concerns internally outside the normal chain of command are also being termed as whistle blowing.

3.2 Definition

According to Vandekerckhove (2006),

“A whistle-blower is a person who exposes any kind of information or activity that is deemed illegal, unethical, or not correct within an organization that is either private or public.”

Important features of whistle-blowing, on the basis of above definition, are as follows:

(i) A whistle-blower can be an employee or a former employee or any other person in a contractual relationship with a company.
(ii) He makes public wrongful acts/information to the outside world or internally outside the usual hierarchical line.
(iii) He reports these acts to someone who is in a position to take action or has an authority to do so.
(iv) Whistle blowing can happen in public or private organisations.

3.3 Types of Whistle-Blowing

Whistle blowing can be classified on the basis of:

3.3.1 External Whistle-Blowing and Internal Whistle-Blowing

(a) If the whistle-blower reports misconduct to a person outside the organization, such as regulatory agency or the media, it is termed as external whistle-blowing. Internal whistle-blowing is a situation when a whistle-blower reports misconduct to another person within the organization but outside the usual line of command.

One of the famous external whistleblowers is Erin Brockovich, a legal clerk and environmental advocate who gained recognition for uncovering the contamination of groundwater in Hinkley, California, by Pacific Gas & Electric (PG&E). The contaminant was hexavalent chromium, a harmful chemical linked to severe health issues in the community. In the 1990s, Brockovich spearheaded efforts to investigate the issue, bringing to light PG&E’s responsibility for pollution. Her work played a key role in securing a $333 million settlement for the affected residents, one of the largest environmental settlements in U.S. history, and raised awareness about corporate environmental misconduct. Cynthia Coppers, who blew the lid off WorldCom Scam, was an employee of the company and is an example of an internal whistle blower.

(b) From a corporate’s point of view both types reflect whistle-blower’s disillusionment with and distrust of the system. However, the damage to reputation of the entity done by external whistle blowing is much more than the latter. It may result in heavy fines and penalties imposed by regulatory authorities.

Types of Whistle-blowing

3.3.2 Open Whistle-Blowing and Anonymous Whistle-Blowing

(a) When whistle-blower reveal his identity as he conveys the information, it is said to be open whistle-blowing and if identity is concealed, it is termed as anonymous whistle-blowing. The main advantage with open whistle-blowing is that the security can be provided to such a person and he/she can be contacted for further information.

(b) In many situations, open whistle blowers have been hugely rewarded in terms of money and, thus, the real motive behind whistle-blowing by such remains doubtful. Anonymous whistle blowing may not be taken seriously by the regulators or the organization and burden of protection of whistle-blower is also not there.

3.4 Pros and Cons of Whistle-Blowing

Whistle-blowing can be a rewarding experience for some whistle-blowers. But others may have to face a backlash or mistrust of others –

3.4.1 Pros of Whistle-Blowing

(a) Financial compensation – Many times, whistle-blower law/policy has a provision of rewarding the whistle-blower financially. For example, whistle-blowers in the US are, generally, entitled to a part of a settlement collected by the Government. Dinesh Thakur, the whistle-blower who helped the US Government show systemic product-testing failures at Ranbaxy and which led to the $500 million settlement in 2013, received $48 million. In US, the Dodd-Frank Act offers financial rewards for whistleblowers who expose securities fraud.

(b) Legal protection – Many people face retaliation when they become a whistle-blower. Organisational policies and laws can protect them from adverse consequences. To take an example, in India Whistle Blowers Protection Act, 2014 seeks to protect whistle blower who has made a public interest disclosure related to an act of corruption, misuse of power, or criminal offense by a public servant.

(c) Reduces risk – One of the main reasons to blow the whistle on any illegal or unethical activity is to protect colleagues and other stakeholders or public at large from certain risks. Whistle-blowing acts as a safeguard.

(d) Ethical responsibility – Whistle-blower may have been pushed to do so by his sense of right and wrong. For example, Sherron Watkins, the former Vice-President of Enron Corporation in US and whistle-blower alerted then-CEO Ken Lay in August 2001 to accounting irregularities within the company. She testified before Congressional Committees from the House and Senate investigating Enron’s demise.

3.4.2 Cons of Whistle-blowing

(a) Retaliation – Whistle-blower may have to face potential retaliation from management, colleagues or even Government. The case of Edward Snowden is an example of a backlash. He leaked details of several top-secret United States mass surveillance programs to the media and was forced to flee the country and seek asylum in Russia to escape prosecution by the US Government. In June 2024, the outgoing CEO of Boeing Dave Calhoun accepted at a Senate hearing in US that Boeing is trying to protect whistle-blowers at his company but still they have faced retaliation.³

(b) Conflict of interest – Many whistle-blowers face an ethical dilemma – whether to protect the short-term interest of colleagues and the organization or to protect the public at large; whether to be disloyal, whether to protect short-term interest of the shareholders or caution future investors. Cynthia Cooper, while serving as Vice President of Internal Audit at WorldCom, played a pivotal role in exposing what was, at the time, the largest case of corporate fraud too faced an ethical dilemma. Recalling the time, she was contemplating exposure she said in a talk, “There were times when I was scared to death. I remember my hands shaking.”⁴ She knew after the exposure; thousands of employees would lose their jobs and retirement savings. Mississippi, where WorldCom was based, would also lose millions in revenue. Despite being sure that she was right, Cooper struggled with depression and found it difficult to move forward from the scandal even after disclosure, as the fallout affected not just the company, but also her own personal and professional life.

3.5 Advantages of a Good Whistle-Blower Policy to Organization

The revelation made by the whistle-blower should be handled promptly by the organization. Many large-scale corporate frauds have come to light through internal whistle-blowing. To ensure transparency and continuous trust and support from all the stakeholders, it is imperative for every organization to lay down a clear and comprehensive whistle blowing policy. Some of the advantages that may accrue to it by such a policy are listed below:

Advantages of Whistle-Blower Policy

3.6 Whistle-Blowing Laws in India

Regulations in India have been laid down relating to whistle-blowing and protection of whistle-blowers. The Companies Act, 2013 and SEBI’s Listing Agreement Requirements have included provisions related to whistle-blowing/ vigil mechanism. The Indian Parliament has also passed Whistle-blowers Protection Act, 2014.

3.6.1 The Companies Act, 2013 and Whistle-Blowing

The Companies Act, 2013, has been framed in the backdrop of various corporate scandals. It prescribes stricter compliance, vigil and disclosure norms than laid by previous Companies Acts. Some examples are as below:

Section 177(9) and 177(10) read with Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 and Schedule IV provides for requirements of Vigil Mechanism as under:

(a) Establishment of vigil mechanism

• Every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances –

1. the companies which accept deposits from the public:
2. the companies which have borrowed money from banks and public financial institutions more than fifty crore rupees

• It may be noted that while section 177(9) of the Act mandates to establish vigil mechanism for directors and employees to report genuine concerns, in case of a listed company, such mechanism is available to all stakeholders.

(b) Overseeing of vigil mechanism:

• The companies which are required to constitute an Audit Committee shall oversee the vigil mechanism through the committee and if any of the members of the Committee have a conflict of interest in each case, they should recuse themselves and the others on the committee would deal with the matter on hand.
• In case of other companies, the Board of Directors shall nominate a director to play the role of audit committee for the purpose of mechanism to whom other directors and employees may represent concerns.

(c)  Safeguard against victimisation and direct access:

• Policy against victimisation of employees and directors who avail of the mechanism should be laid.
• Provide for direct access to the chairperson of the Audit Committee or the director nominated to play the role committee in exceptional cases.

(d) Disclosure

The company must disclose details of the mechanism on its website and in the Board’s report.

(e) Safeguard against frivolous complaints:

• In case of repeated frivolous complaints being filed by a director or an employee, the Audit Committee or the director nominated to play the role of Audit Committee may take suitable action against concerned director or employee including reprimand.

(f) Role of independent directors – Schedule IV: Code for Independent Directors:

• Ascertain and ensure that the company has an adequate and functional vigil mechanism.
• Ensure that interests of a person who uses the mechanisms are not affected.

3.6.2 SEBI and Whistle-Blowing

• EBI has introduced the concept of whistleblowing by adding Chapter IIIA to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations). This enables whistleblowers to report insider trading violations directly to SEBI, circumventing the internal reporting mechanisms of companies. The goal is to externalize the reporting process, thereby enhancing the security and anonymity of whistleblowers, which is expected to lead to an increase in reported violations.
• Additionally, SEBI has announced financial rewards to further encourage whistleblowing. SEBI retains the sole discretion to declare an informant eligible for a reward and will notify the informant or their legal representative to file an application in the specified format to claim the reward. The reward is set at 10% of the monetary sanctions, capped at INR 10 crores, or a higher amount as may be specified by SEBI from time to time

3.6.3 Whistle-Blowers Protection Act, 2014

On May 14, 2014, the Whistle-Blowers Protection Act, 2014 received Presidential assent. The salient features of this Act are:

(a) The Act seeks to protect persons making a public interest disclosure (whistle-blowers) related to an act of corruption, misuse of power, or criminal offence by a public servant.
(b) The Central Vigilance Commission (CVC) is empowered to receive complaints, assess public disclosure requests, and safeguard complainants.
(c) Every complaint must include the identity of the complainant.
(d) It ensures confidentiality of the complainant and penalizes any public official who reveals a complainant’s identity, without proper approval.
(e) The Act prescribes penalties for knowingly making false complaints.

The Whistle-Blower Protection Act has attempted to balance two conflicting interests—the need to protect the whistle-blowers against the need to protect public officials from unnecessary harassment.

1. Section 195 of the Companies Act, 2013 that dealt with insider trading of securities has been omitted by the Companies Amendment Act, 2017.
2. https://www.taxmann.com/post/blog/analysis-sebis-new-insider-trading-regulations-key-changes-and-implications
3. https://www.latimes.com/business/story/2024-10-08/boeing-whistleblower-lawsuit-story
4. https://www.jmu.edu/news/2013/11/14-cooper-demonstrates-power-of-choice-in-business-ethics.shtml

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CA. Rakesh Kedia & Yamish Jain – [2026] 182 taxmann.com 44 (Article)

1. Background and Need for Re-enactment

The Income-tax Act, 2025 replaces the Income-tax Act, 1961 after more than six decades of continuous amendments that resulted in fragmentation, excessive cross-referencing, and uneven drafting. The new legislation is presented as a overall restructuring undertaken to modernize the tax code.

The Government asserts through the Statement of Objects and Reasons for the Income Tax Act, 2025 that three foundational principles of this act are:

1. Textual and structural simplification for improved clarity and coherence
2. No major tax policy changes to ensure continuity and certainty.
3. Stability of tax rates to ensure predictability for taxpayers and businesses.

To implement the goal of simplification, the Income-tax Act, 2025 adopts a refined drafting approach—featuring shorter sentences, clearer terminology, reduced reliance on legal jargon and provisos, extensive tabulation of provisions, and consolidation of related rules into unified sections.

For example, phrases like “Notwithstanding anything contained” and “Without prejudice to…” have been replaced with more direct and accessible language. However, it is important to note that these linguistic changes do not alter the legal interpretation of the provisions. Despite differences in wording, the substance and intent remain consistent with the earlier law. What may appear to be a deviation on a plain reading is, in fact, a clarification aimed at enhancing understandability without affecting the legal position.

While some provisions may at first glance appear to reflect policy changes, it is important to note that they are intended to be interpreted in the same manner as under the earlier law. The legislative intent behind the Income-tax Act, 2025 is one of structural and linguistic simplification rather than substantive overhaul. Accordingly, all judicial pronouncements rendered under the 1961 Act continue to remain valid and form the basis for interpretation under the new act.

2. Key Changes Which May Appear to be Policy Departures

2.1 Mandatory Taxability of Unexplained Credits/Investments

One of the most debated changes in the Income-tax Act, 2025, is the shift in language across provisions dealing with unexplained income. The relevant section numbers as per the old act and the new act are as under:

“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year”.

Click Here To Read The Full Article 

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The effectiveness of independent directors in corporate governance refers to the extent to which independent directors are able to exercise objective judgment, provide robust oversight, and protect the interests of shareholders and other stakeholders by ensuring transparency, accountability, and ethical conduct within a company. Effective independent directors strengthen board governance by monitoring management performance, overseeing risk management and internal controls, scrutinising related-party transactions, ensuring integrity of financial reporting, and preventing abuse of power by controlling shareholders or promoters. Their effectiveness depends on genuine independence, adequate authority, access to accurate information, professional competence, sufficient time commitment, and freedom from undue influence of promoters or executives. When independent directors function effectively, they enhance decision-making quality, improve compliance with legal and regulatory frameworks, reduce governance failures, and contribute to long-term corporate sustainability and investor confidence.

Table of Contents

1. 1. Effectiveness of Independent Directors
   2. Board Duality

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1. Effectiveness of Independent Directors

The major role that independent directors play in a company broadly includes improving the overall corporate governance framework and risk management processes of the company. The empirical evidence in different jurisdictions point out a significant improvement in the corporate governance standards with the induction of independent directors. In the boards especially in family controlled and concentrated shareholding companies the presence of independent directors has ensured structured agenda, deliberate discussions, and compliance regarding board processes. One of the important roles of board is to oversee and ensure compliance of the company with the rules and regulations. Independent directors are legally liable for negligence and are required to exercise utmost due diligence over all the financial and executive decisions of the company they are associated with.  They are expected to bring out, misappropriation, non-compliance with legal provisions, malpractices etc. in the company.

In case of Satyam computer scam the court imposed hefty fine on the independent directors. There are many cases including Enron, WorldCom, Dewan Housing Finance, IL&FS wherein independent directors not only came under scrutiny, but they dented their reputation also.

Independent directors act as monitor of controlling shareholders. Independent directors prevent business decisions that are unfair to minority shareholders and other stakeholders. The audit committee headed by an independent director monitors all the related–party transactions, engage with the statutory auditors, and ensure integrity of financial reports. There are many instances wherein independent directors have blocked decisions which are not in the interest of the companies. There is no dearth of cases of independent directors asking tough questions and taking tough decisions despite pressure from the promoters or controlling group of shareholders. In fact, the institution of independent directors is well established and respected all over the world.

However, questions are often raised about the ‘genuine independence’ and effectiveness of independent directors. This is because these are appointed by the controlling group of shareholders or the promoters in most companies in Asia marked by domination of families. As independent directors are dependent on the families or the controlling group of shareholders for their appointment and continuation of appointment, it may impair their independence. In widely held big corporations of the US and UK, nomination process of independent directors is tilted more in favour of executives of the company particularly the CEOs of the companies who suggest the names of potential directors and finally the appointments are carried through the ‘nomination committees’ of the boards before approved formally by the shareholders in the annual general meetings. The independent directors may thus become dependent on the CEOs or chairman of the companies for their continuation/re–election.

Despite the prescribed independence criteria, some independent directors may have past or ongoing associations with the company’s promoters or management. While these relationships may not be classified as “material” under the legal definition of independent director, in many cases it impacts judgment and decision–making of the independent directors. In state run public enterprises wherein political workers or persons loyal to the political party in power are obliged by offering them independent directorships in the companies, subconscious biases, affiliations, and loyalties, or undue familiarity sway judgment diluting the rigour and neutrality expected of their role. It gives rise to a fundamental issue of independence in fact (real independence) and independence in appearance (perceived independence).

Leaving the issue of ‘independence’ aside, doubts are also expressed on the efficacy of independent directors. As independent directors may be engaged in activities other than directorships in companies, they have limited time at their disposal to participate in board processes effectively. When making decisions, these directors have to rely on the information presented to them by the executives of companies. In some jurisdictions, directors have a legal right to inspect records of companies. Yet time constraints generally render this right ineffective. Many a times, independent directors lack proper training and orientation to influence board decisions. Given these constraints, independent directors can hardly initiate much of the corporate strategies or policies or bring to fore ‘independent and objective judgments’ to ensure that corporate decisions are made in the best interests of all the shareholders.

Failure of board of directors especially independent directors is the most common governance failure noticed in various corporate failures whether it is Enron or WorldCom or Parmalat or the Satyam. Some of the cases are as under:-

(i) Enron Corporation was an American energy, commodities, and services company based in the USA collapsed in 2001. On paper, Enron had a model board of directors comprising predominantly outsiders with significant ownership stakes and a talented audit committee. In its 2000 review of best corporate boards, Chief Executive included Enron among its top five  boards. Collapse of Enron may be construed as failure of corporate governance in particular the board of directors of Enron. The board failed miserably in its oversight responsibilities. The board had no clue of what the executives were doing. The directors failed to understand the related party transactions between Enron and SPEs. The board flawed in implementing proper systems of control and risk management.

(ii) The non-executive directors on the Maxwell Communication board, all reputed persons, did little in discharging their responsibilities. Unrestricted movement of funds across group companies, pledging shares of a company to raise funds for another company, excessive borrowings took place under the nose of the board. It appeared that the board was helpless in the face of larger-than-life personality of Robert Maxwell.

(iii) WorldCom had the board of directors consisting of 11 directors, eight of whom were independent. The board failed to fulfil its basic responsibilities. Acquisitions made by the company with the approval of the board, in many instances appeared to be opportunistic rather than part of the long-term strategic plan. The board’s review of acquisitions was not comprehensive and left the company highly levered. These strained the financial structure of the company and complicated the analysis of the financial performance measurement. The board neglected in every aspect of the monitoring and oversight over the executives. The board failed to act or ignored accounting irregularities besetting the company more than 12 months before the company collapsed ultimately.

(iv) The debacle of Satyam Computer in 2009 demonstrated the ineffectiveness of independent directors. The board of directors of Satyam had well acclaimed persons as the members. The board failed miserably in its prime duty of oversight. The fraud had been cooking in Satyam for years together. On the behest of the promoters the board cleared the deal of acquiring family concerns of the promoters even though it was a major departure from the normal activities and expertise of Satyam. The high-profile independent directors chose to remain silent spectators to the pranks of the chairman of the company reducing themselves to the ‘passive observers’.  The board of directors of Satyam composed of a majority of independent directors, and the ‘independent’ Audit Committee of the Company miserably failed to exercise the important ‘oversight’ role and remained either ignorant of the whole scam or turned a blind eye to wrong practices ostensibly in fear of losing continuance of their job in the company from which they were getting hefty remuneration.  The Central Bureau of Investigation report stated

“The members of the Board of Directors had acted as “rubber stamps”, unwilling to oppose the fraud. Not a single vote of dissent has been recorded in the minutes of the Board meetingsⁱ”.

(v) One of the important roles assigned to independent directors is overseeing the policy implementation and ensuring that the business is carried on in the interest of the company. Infrastructure Leasing & Financial Services Ltd. (IL&FS) became highly levered and started making default in debt repayments in 2018. IL&FS had a board of directors consisting of eminent persons as independent directors and nominee directors from SBI, LIC and CBI. It seems that the directors in the company were either negligent or they lacked expertise in managing a complex infrastructure financing NBFC. The board failed miserably in managing the liquidity crisis that was brewing over the last four years. It is no wonder that, with such poor board oversight, IL&FS had ventured down a path of mis-governance, resulting in the company defaulting on its financial obligations.

1.1 Enhancing the Effectiveness of Independent Directors

1. Strengthening the Selection Process – Policymakers and regulators should establish robust criteria for determining the independence of directors. In India there is an online data bank of the independent directors and the requirement to pass online proficiency test, but generally directors are hand-picked by promoters. The role of nomination committee of the board is important in setting standards for nomination of directors and screening the probable candidates.
2. Promote diversity on Boards – Independent directors should be appointed with a diverse range of expertise and professional backgrounds. Companies should appoint directors from diverse backgrounds including gender and region. This will ensure that boards have a range of perspectives and experiences which can lead to better decision-making.
3. Enhancing the authority of Independent Director – The authority granted to independent directors does not commensurate with their responsibility.  There is a need to augment the authority granted to the. A comprehensive board charter outlining the roles, responsibilities, and authority of independent directors should be established. The company needs to ensure that independent directors have timely access to accurate and relevant information about the company’s operations, financials, risks, and performance. This will empower them to make informed judgments and actively participate in discussions.
4. Induction, Training and Development of  Directors – A newly appointed director needs to undergo an induction programme to obtain essential knowledge about the company and its industry. For incumbent directors, continuous updating and professional development has become more important in the wake of growing complexities of the business and rapid acceleration of new regulations and legal requirements for directors. These programs should cover corporate governance best practices, legal and regulatory requirements, risk management, ethics, and sustainability. Companies should invest in continuous training and development programmes for independent directors to keep them updated on industry trends, best practices, and changing regulatory landscapes.
5. Performance Evaluation – Regular evaluation of independent directors’ performance, both individually and collectively should be undertaken by the entire board. This will identify potential conflicts of interest or shortcomings in fulfilling their responsibilities. The peer review can consider the constructive and less constructive roles individual directors play in discussions, the value and use of various board members’ skill sets, interpersonal styles, individuals’ preparedness and availability, and directors’ initiative and links to critical stakeholders. This process should be driven by a board committee such as a nominating or governance committee. The continuation of independent directors should depend on satisfactory evaluation report. Absence of evaluation has often led to the situation of independent director being a ‘puppet independent director’ who are unable to perform the duties of directors as they lack skills inside the board rooms.
6. Promote greater engagement between directors and other stakeholders, including shareholders, employees, and customers. This will help ensure that directors have a better understanding of the concerns and perspectives of the stakeholders. It will facilitate the directors to deliberate effectively in the boardrooms.
7. Appointment of Lead Independent Director – When the Chairman of the board of directors is not independent or serves as CEO of the company also, there is a practice in some jurisdictionsⁱⁱ to designate an independent director as the ‘Lead Independent Director’ or Senior Independent Director’ to serve in a lead capacity to coordinate the activities of the other independent directors and to perform such other duties and responsibilities as the board of directors may determine. Lead independent director serve as liaison between chief executive office, senior management of the company and the independent directors. Such  director also chairs the meetings of the independent directors without the presence of executive directors. This practice should be adopted by the companies to enhance the effectiveness of independent directors.

2. Board Duality

CEO duality is a governance structure where the CEO of a company also serves as the chairman of the board of directors. While CEO is liable for the performance of the company and for safeguarding the stakeholders’ interests, the role of the chairman in a company is to run the board and ensure effectiveness of the board in implementation of the strategies. Both positions are equally important top-level leadership in a company responsible for the success and sustainability of the firm.

One of the most contentious issues in corporate governance is whether the positions of CEO and chairman may be combined in the same person or separated. The reforms in corporate governance which came largely in the wake of the corporate scandals all over the world, prescribe persistently a clear division of responsibilities between chairman and CEO of the company.  Sir Adrian Cadbury, chairman of the Committee in the U.K. which investigated corporate governance issues in the early 1990s emphasised that ‘the jobs of chairman and chief executive demand different responsibilities and perhaps temperaments. It is very much in shareholders’ interests to ensure they are performed by different people’. The Cadbury Committee clearly recommended that “there should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision”. Asserting chairman and CEO as two jobs and not one, many corporate governance codes and guidelines seek to institute independent chairman of the board of directors.

The primary role of a board of directors is to monitor and supervise the operations and ensure that the CEO and other executives run the company in the best interest of the shareholders. The CEO heads the management to implement the policies and strategies laid down by the board of directors.  When CEO is also the chairman, he/she monitors her/himself, which may lead to abuse of power and position. This has given rise to many corporate scams and frauds.

The preference for the separate CEO-Chairman is largely grounded in the agency theory of corporate governance concerning the potential for managerial abuse. Cadbury Committee, 1992 and many codes of corporate governance strongly advocate that CEO of the company should not serve simultaneously as chairperson of the board. If chairman and CEO is the same person, it becomes more difficult for the board to provide an independent oversight of management or to evaluate the CEO or to express independent opinion on the management. An independent structure of the chairman is prescribed to facilitate objective assessment of the company and the top management of the company.

On the other side, the practicing managers rarely adopt the view that separation of the two positions is the superior structure. The CEO and the board chairman are two of the most positions in a company. Since CEO duality combines the responsibilities of both positions into one person, it cultivates a stronger and unified leadership at the top. The stewardship theory also suggests that the duality of the CEO and chairman joint structure provides unified firm leadership and removes any internal or external ambiguity regarding who is responsible for firm processes and outcomes. Duality offers the clear direction of a single leader, and a faster response to external events. The CEO-cum chairman is expected to have a greater knowledge of the company and the industry and have greater commitment to the company than a separate chairman.

CEO duality is more common in the U.S.A. than other part of the world. Although the current U.S. reforms do not mandate the separation of the roles of Chairman and CEO, they certainly reflect a desire to shift the power centre of the corporation away from the CEO to the Board. While Sarbanes-Oxley Act (SOX) addresses issues of managerial and board integrity through a number of provisions, listing rules of the NYSE and NASDAQ call for the boards to be comprised of a majority of independent directors.

In the UK on the other hand, the corporate governance code prescribes that the roles of chairman and chief executive should be split and further a chief executive should not go on to become chairman of the same company. There is a high level of compliance in the U.K., particularly among larger listed companies of the principle of separation of the two roles.

The Indian codes of corporate governance viz. CII code, Clause 49 of the Listing Agreement, Revised Clause 49 while silent on the issue of separation of chairman and CEO, linked independent (non-executive) chairman with the component of independent directors in the board of directors of company. The CII report recommended that if the chairman and CEO (or Managing Director) is the same person, independent directors should constitute 50% of the board, and 30% of the board in case the two positions are separate. The Kumar Mangalam Birla Committee’s views on the subject were quite ambiguous. The committee believed the chairman’s role should in principle be different from that of the chief executive, though the same individual may perform both the roles.

In the mandatory category of recommendations, the committee dittos the CII recommendations of linking non-executive chairman with the composition of board of directors of the company. The same provision was incorporated in Clause 49 as well reiterated in the Revised Clause 49 of the Listing agreement by the SEBI.

Based on the recommendations of the Uday Kotak Committee on Corporate Governance, the Securities and Exchange Board of India (SEBI) amended the SEBI (Listing Obligations and Disclosure Requirements (LODR)) Regulations, 2015. The amendment requires the split of the positions of the Chairman and Chief Executive Officer (CEO). In addition, the LODR Regulations provide that the chairman and CEO must not be related to each other. The amendment also requires that the position of chairman be held by a non-executive member. This regulation was to be applicable to the top 500 listed entities by market capitalisation from April 1, 2022. However, on the persistent demand of the corporate sector, SEBI made the rule of separation of CEO and Chairman voluntary.

2.1 Gender Diversity in Boards

In recent years board diversity has caught the attention of policy makers and practitioners, primarily driven by a concern for greater equality for men and women at the level of the board. It is also strengthened by the belief of behavioural difference in core values of female directors who would bring a different perspective in the board room.

The gender diversity in the board is advocated worldwide either through quota regulations or codes. The regulations in developed economies like Norway, Germany, Belgium, Iceland, and France pose a requirement of at least 40 per cent women on the boards of publicly traded firms. The governments of many other countries, like Australia, Britain and Sweden desire the listed entities to appoint an appropriate mix of women directors on the boards.

In quite a few European countries and in India, board gender diversity was introduced in listed firms by the legislation. A sustained pressure also came from national and international bodies.

In India, section 149(1) of the Companies Act, 2013 requires that the following class of companies must appoint at least one-woman directors on the board:

(i) Every listed company.

(ii) Every other public company having paid up capital of ₹ 100 crore or more, or turnover of ₹ 300 crore or more.

The Securities and Exchange Board of India (SEBI) Regulations, 2015 (LODR) also requires the boards of the top 1000 listed entities to appoint at least one independent woman director.

Presently, the composition of female members in the Indian boards is just 13.8 per cent which is much below the worldwide average. With Norway on the top with 41 per cent, France 37.2 per cent, South Africa 26.4 per cent, the global average is 16.9 per cent (Deloitte, 2018).

There are few theories which provide a strong rationale of women directors in the boardrooms.  Resource Dependence theory posits the board’s role to connect the firm with the external environment and bring various resources to expand the boundaries. It is argued that female directors bring a different set of knowledge, skills, and experience. A study of Bank of America Merrill Lynch (2018) also opines that gender diversity may provide a heterogeneous opinion in the boardrooms enabling the company to compete and adapt to changes in the industry. It has been pointed out that women bring ‘competitive advantage’ to the firm by dealing with the labour and product market efficiently. There is evidence which shows the experience of women in the boardroom valuable as they may understand consumers in some markets better than men. Thus, gender diversity on the round table enhances creativity and innovation.

The study of Forbes also advocated that a ‘diverse board is better positioned to understand its customer base and the business environment in which it operates’ (Forbes, 2018). Women directors make the board diversified to represent diverse customer base (The Economist, 2014). There are various psychological studies which state that women in leadership position enhance communication between different stakeholders and hence improves firm chance to perform better.

Gender role theory links gender with the behaviour and effectiveness of the individual. Women are regarded as risk-aversive and are less willing to take the extreme risk to earn phenomenal returns. There are many research studies which postulate the risk-averse nature of women. These studies concluded that firms which had more females in the top management team exhibited lower risk and better performance.

Many studies both by the researchers and consultancy firms have been undertaken to explore relationships between women directors and corporate financial outcomes. Many of these (Credit Suisse Research Institute, 2019, Bank of America Merrill Lynch, 2018, and Deloitte, 2018) unequivocally pointed out diversity as not only the right thing to do but also leading to ‘smarter decision-making’ impacting earnings significantly.

i. Satyam CBI Report (http://www.topnews.com.sg/content/22973-satyam-scam-board-directors-also-party-fraud)
ii. The practice is mandated by the codes of corporate governance of the quite some countries. It is discussed in detail in chapter.

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