Corporate Governance, CSR, and Shareholder Protection under Companies Act, 2013

Posted on Jan 9, 2026 in Law & Jurisprudence

Corporate Social Responsibility (CSR)

Meaning and Scope of Social Responsibilities

Social responsibility refers to the obligation of companies to act in ways that benefit society while conducting business operations. It involves going beyond mere profit-making to consider the welfare of employees, customers, society, and the environment.

Key Aspects of Social Responsibility Towards Stakeholders:

Towards Shareholders: Ensure fair returns on investment, transparent disclosure, and good governance.
Towards Employees: Provide fair wages, job security, safe working conditions, and opportunities for career growth.
Towards Customers: Supply quality products, ensure fair pricing, and maintain ethical advertising.
Towards Government: Comply with laws, pay taxes honestly, and assist in national development.
Towards Society: Promote education, healthcare, environmental protection, and upliftment of weaker sections.
Towards Environment: Use eco-friendly production methods and reduce pollution and carbon footprint.

Mandatory CSR Provisions (Section 135, Companies Act, 2013)

The Companies Act, 2013, mandates Corporate Social Responsibility (CSR) for certain companies based on financial thresholds:

A company must follow CSR provisions if it fulfills any one of the following conditions in the previous financial year:

Net worth of Rs. 500 crore or more, or
Turnover of Rs. 1000 crore or more, or
Net profit of Rs. 5 crore or more.

Key Requirements under CSR Law:

CSR Committee: Such a company must form a CSR Committee consisting of at least three directors (including one independent director) to frame and monitor the CSR policy.
CSR Policy: The policy must define the company’s approach, focus areas, and type of CSR activities it will undertake.
CSR Spending: The company should spend at least 2% of its average net profits (of the last three financial years) on CSR activities.
CSR Reporting: Companies must disclose CSR activities in their annual report and on their official website.

Corporate Governance: Principles and Practice

Meaning and Objectives of Corporate Governance

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of various stakeholders such as shareholders, management, customers, suppliers, financiers, and the community.

Objectives of Good Governance:

Transparency in management and operations.
Accountability of the board.
Protection of shareholder interests.
Promotion of ethical corporate behavior.

Pillars and Key Features of Corporate Governance

Good corporate governance rests on fundamental principles that ensure ethical and effective management:

Transparency: Clear and timely disclosure of financial and operational information to stakeholders helps build trust and reduces the chances of fraud.
Accountability: The Board of Directors and management are answerable to the shareholders and stakeholders for their actions and decisions.
Fairness: Equal treatment of all stakeholders, including minority shareholders, creditors, and employees, is essential.
Responsibility: Ethical and lawful actions by management, ensuring the company’s sustainability and stakeholder protection. Corporate decisions should consider their impact on the environment and community.
Independence: The Board should include independent directors to ensure unbiased decision-making, not favoring promoters or major shareholders.
Ethical Conduct: Adopting high ethical standards and avoiding conflicts of interest are core to good governance.

Benefits of Strong Corporate Governance

Enhances investor confidence and attracts foreign investment.
Promotes financial stability and improves company valuation.
Reduces corruption, malpractice, and risk of fraud.
Improves company performance and reputation.
Promotes sustainable business practices.

Company Fundamentals and Characteristics

Definition of a Company

A company is a legal entity formed under the Companies Act to carry on business. It has a separate legal existence from its members and can own property, incur debts, and sue or be sued in its own name.

According to Section 2(20) of the Companies Act, 2013, “Company means a company incorporated under this Act or any previous company law.”

Key Characteristics of a Company

Incorporated Association: A company comes into existence only after registration under the Companies Act. It is a legal creation.
Separate Legal Entity: A company is distinct from its owners. It can own assets, enter into contracts, and sue or be sued in its own name.
Perpetual Succession: A company continues to exist even if the members change due to death, insolvency, or transfer of shares. It has an unending life unless legally wound up.
Limited Liability: The liability of members is limited to the extent of the unpaid value of shares held by them. Personal assets are not at risk.
Transferability of Shares: In public companies, shares can be freely transferred, ensuring liquidity for shareholders.
Artificial Legal Person: A company is created by law and lacks a physical body, but it enjoys rights and duties like a natural person.
Common Seal (Optional): While previously mandatory, the use of a common seal is now optional after amendments.

Shareholder Protection: Oppression and Minority Rights

Majority Rule and Protection of Minority Rights

In corporate decision-making, the principle of Majority Rule (established in Foss v. Harbottle, 1843) dictates that the decisions of the majority of shareholders bind the company and the minority must abide by them. This ensures efficient management.

However, to prevent abuse of power, the Companies Act provides specific Minority Rights to protect smaller shareholders from unfair decisions or oppression.

Concept of Oppression

Oppression in corporate terms refers to the unfair treatment of minority shareholders by the majority. It involves conduct that is burdensome, harsh, and wrongful, disregarding the interests or rights of minority shareholders.

Relevant Provision:

Under Section 241 of the Companies Act, 2013, a shareholder can file a complaint to the National Company Law Tribunal (NCLT) if the company’s affairs are being conducted in a manner prejudicial to public interest or oppressive to any member.

Examples of Oppression:

Denial of dividends to minority shareholders without justification.
Misuse of company funds for personal benefit by the majority.
Allotment of shares specifically designed to dilute minority holdings.
Non-transparent or biased decision-making by majority shareholders.

Prevention of Mismanagement and NCLT Remedies

Mismanagement refers to the misapplication of company resources or running the company in a manner harmful to its interests or to its members. Prevention of mismanagement is essential to protect stakeholders and ensure good governance.

NCLT Remedies for Oppression and Mismanagement (Sec 241 & 242):

The NCLT has broad powers to intervene and provide relief, including:

Ordering the regulation of the company’s affairs for the future.
Termination or modification of agreements.
Removal of managing directors or other officers.
Recovery of misused funds or assets.

Rights and Remedies of Minority Shareholders

Minority shareholders (those holding less than 50% of shares) have specific statutory rights to ensure their interests are protected:

Right to Apply Against Oppression and Mismanagement (Sec 241): If company affairs are prejudicial to their interests, they can approach the NCLT for relief (usually requiring 10% shareholding or more).
Right to Call an Extraordinary General Meeting (Sec 100): Shareholders holding at least 10% of voting power can requisition an EGM.
Right to Class Action Suits (Sec 245): A group of affected shareholders can file a suit against directors, auditors, or advisors for acts against the company’s interests.
Right to Inspect Books and Records (Sec 171): Members have the right to inspect minutes, registers, and certain financial documents.
Right to Vote and Receive Dividends: They are entitled to vote on resolutions and receive their share of profits.

Corporate Restructuring and Investigation

Scheme of Compromise and Arrangement

This scheme facilitates corporate reorganization and resolution of financial distress.

Compromise: A mutual settlement between the company and its stakeholders (creditors or shareholders).
Arrangement: Includes reorganizations such as mergers, demergers, or reconstruction.

Applicable Law and Purpose:

Under Sections 230 to 240 of the Companies Act, 2013, companies can approach the NCLT for approval.

The purpose of the scheme is:

To resolve financial distress.
To reorganize company structure.
To facilitate mergers or amalgamations.
To avoid lengthy litigation.

Process:

Proposal of Scheme by company or stakeholders.
Application to NCLT for calling a meeting of stakeholders.
Approval of scheme by majority (75% in value) of stakeholders present.
Sanction by NCLT and filing with the Registrar of Companies.

Appointment of Inspector and Investigation Powers

An Inspector is a person appointed by the Central Government or NCLT to conduct an investigation into the affairs of a company under the Companies Act, 2013 (Sections 210 to 229).

Grounds for Appointment:

Fraudulent activities.
Mismanagement or oppression.
Misuse of funds or assets.
On application by members, order by Tribunal, or report by Registrar (in public interest).

Rights of an Inspector:

The inspector is granted significant powers to ensure a thorough investigation:

Right to Access Books and Records (Sec 217): The inspector can demand production of books of accounts, papers, and other relevant documents of the company and its subsidiaries.
Right to Examine Officers and Employees (Sec 217): The inspector can examine directors, officers, and other employees on oath to gather relevant information.
Right to Seize Documents (Sec 220): With prior approval of the government, the inspector can seize documents if they are likely to be destroyed or altered.
Right to Investigate Related Companies (Sec 219): The inspector can investigate related companies such as holding, subsidiary, or associate companies.
Right to Take Legal Assistance: The inspector can take help from legal experts or professionals while conducting an investigation.

Duties of an Inspector:

Conduct Fair Investigation: The inspector must act without bias and investigate objectively based on facts and evidence.
Maintain Confidentiality: Sensitive information obtained during investigation must be kept confidential and used only for legal purposes.
Submit Report Promptly: The inspector is expected to complete the investigation within a reasonable time and submit reports without delay.
Follow Legal Procedures: The inspector must adhere to all legal procedures and safeguards to protect the rights of individuals.
Avoid Misuse of Power: The inspector must not misuse the powers granted under the Companies Act and should not harass company personnel.

Ethical Framework: Principles of Morality

Importance of Morality in Business

Principles of morality refer to ethical standards and values that guide individuals and businesses in making fair and just decisions.

Key Principles of Morality:

Honesty: Telling the truth and not deceiving others.
Integrity: Acting consistently with one’s moral values.
Fairness: Treating all stakeholders justly and without bias.
Responsibility: Being accountable for one’s actions.
Respect: Valuing others’ rights and opinions.
Transparency: Being open about decisions and actions.

Importance in Business:

Builds trust and reputation.
Encourages long-term success and sustainability.
Helps in compliance with legal standards.
Prevents unethical practices like fraud and corruption.