Corporate Governance & Business Ethics
This chapter closes Finance & Management's Section II with the institutional side of ethics — how a board is actually structured and held accountable, and what the law specifically requires of a company's social responsibility spending. Both topics reward citing the exact legal threshold or named committee rather than a general statement about "good governance."
1. Corporate governance — the board's role
Corporate governance is the system by which companies are directed and controlled, and its central mechanism is the board of directors' oversight of management on behalf of shareholders and other stakeholders — a board's core governance functions include setting strategic direction, appointing and overseeing senior management, ensuring financial reporting integrity, and managing risk.
Independent directors exist specifically to bring a check on management and controlling-shareholder influence that a purely management-appointed board cannot provide — their independence is defined by the absence of material pecuniary or business relationships with the company that could compromise objective judgment, and their genuine, active participation (not just formal board attendance) is precisely what the Kotak Committee's reforms targeted.
2. The Kotak Committee (2017) — the modern reference point
The SEBI Committee on Corporate Governance, chaired by Uday Kotak and commonly called the Kotak Committee, submitted its report in October 2017 with 80 recommendations aimed at raising listed-company governance standards — SEBI subsequently accepted a substantial share of these (with some modifications) and implemented them through amendments to the Listing Obligations and Disclosure Requirements (LODR) regulations.
The committee's recommendations clustered around a specific set of concerns: strengthening independent directors' genuine independence and active participation, tightening related-party-transaction disclosure and approval (since related-party deals are a classic channel for value extraction by a controlling shareholder at minority shareholders' expense), improving board-evaluation practices, limiting how many directorships a single individual can hold (to ensure genuine engagement rather than nominal board membership across many companies), and mandating secretarial audits for listed entities.
Related-party transactions are a recurring governance-failure pattern specifically because a transaction between a company and an entity connected to its own promoters or directors can be priced to benefit the connected party at the listed company's (and its minority shareholders') expense — which is exactly why disclosure and independent-director approval requirements for such transactions are a governance-reform priority rather than a bureaucratic formality.
3. Corporate Social Responsibility (CSR) — a legal mandate, not a voluntary gesture
Section 135 of the Companies Act, 2013 makes CSR spending a legal obligation for companies crossing ANY ONE of three financial thresholds in the immediately preceding financial year: net worth exceeding ₹500 crore, turnover exceeding ₹1,000 crore, or net profit exceeding ₹5 crore — meeting even one criterion (not all three) triggers CSR applicability, a detail F&M questions specifically test.
A qualifying company must spend at least 2% of its average net profit over the preceding three financial years on CSR activities, through a CSR Committee comprising at least three directors, of whom at least one must be an independent director — and for a newly incorporated company without three years of financial history, the 2% is calculated on the average net profit over whatever shorter period is actually available since incorporation.
Unspent CSR amounts are not simply forfeited or left at a company's discretion: depending on whether the unspent amount relates to an ongoing project or not, it must be transferred either to a specified Schedule VII fund (like the PM CARES Fund) or to a separate "Unspent CSR Account," and utilised within a prescribed timeframe — a compliance mechanism that underscores CSR's status as a binding legal obligation rather than optional philanthropy.
4. Workplace ethics and the broader stakeholder view
Business ethics in a corporate context extends beyond CSR spending to the conduct of business itself — fair dealing with customers and employees, whistleblower protection mechanisms, anti-bribery and anti-corruption policies, and conflict-of-interest management — and F&M questions on this theme typically test whether a candidate can connect a specific ethical-lapse scenario to the specific governance mechanism (independent-director oversight, related-party disclosure, whistleblower policy) designed to catch or prevent it.
Worked Examples
Example 1. A company has a net worth of ₹600 crore but a net profit of only ₹3 crore in the preceding year. Is it subject to the CSR mandate?
Yes — meeting ANY ONE of the three thresholds (net worth >₹500 crore, turnover >₹1,000 crore, net profit >₹5 crore) triggers applicability; net worth alone exceeding ₹500 crore is sufficient, regardless of the net profit figure.
Example 2. What percentage of average net profit must a qualifying company spend on CSR, and over what period is that average calculated?
At least 2%, calculated as the average net profit over the preceding three financial years (or the available shorter period for a newly incorporated company).
Example 3. Who chaired the SEBI Committee on Corporate Governance, and when did it submit its report?
Uday Kotak; the report was submitted in October 2017.
Example 4. Why is a related-party transaction considered a classic governance-risk pattern?
Because it can be priced to transfer value from the listed company (and its minority shareholders) to an entity connected to its promoters or directors — disclosure and independent approval requirements exist specifically to prevent this kind of extraction.
Example 5. What must a CSR Committee's minimum composition be?
At least three directors, of whom at least one must be an independent director.
Example 6. A company fails to spend its full mandated CSR amount on an ongoing project in a given year. What happens to the unspent amount?
It must be transferred to a separate "Unspent CSR Account" (for ongoing projects) and utilised within a prescribed timeframe, rather than simply being forfeited or left to the company's discretion — non-ongoing-project unspent amounts instead go to a specified Schedule VII fund.
Example 7. Name two specific concerns the Kotak Committee's recommendations addressed.
Any two of: strengthening independent directors' genuine independence/participation, tightening related-party-transaction disclosure, improving board-evaluation practices, limiting multiple directorships, or mandating secretarial audits.
Summary
Corporate governance centres on the board's oversight role, and independent directors exist specifically to check management and controlling-shareholder influence — a role the Kotak Committee's 2017 reforms (80 recommendations, implemented via SEBI LODR amendments) specifically strengthened, alongside tighter related-party-transaction rules, better board evaluation, directorship limits, and mandatory secretarial audits.
CSR under Section 135 of the Companies Act, 2013 is a precise legal mandate: any ONE of three financial thresholds (net worth >₹500 crore, turnover >₹1,000 crore, net profit >₹5 crore) triggers a 2%-of-average-net-profit spending obligation, overseen by a CSR Committee with at least one independent director, with unspent amounts subject to mandatory transfer and utilisation rules rather than discretionary carry-forward.
Related-party transactions are the recurring governance-failure pattern this entire framework is built to guard against, and F&M questions reward connecting a specific ethical scenario to the specific governance mechanism designed to address it.
