Reforming Corporate Governance in India: A closer look at director retirement and RPT disqualification

Introduction.

Corporate governance in India has seen a remarkable transformation over the years, with the Companies Act, 2013 introducing pivotal reforms to strengthen the framework. Yet, certain provisions now appear outdated or impractical in the present business landscape, particularly those relating to the retirement of directors by rotation and the disqualification of directors in cases involving related party transactions. These areas have sparked both legal and operational challenges, highlighting the need for thoughtful reform. This article examines these provisions and explores proposed changes aimed at modernizing India’s corporate governance regime.

Retirement by rotation is an outdated rule?

What does the current law say?

Section 152(6) of the Companies Act, 2013 provides that at least two-thirds of the directors of a public company must be subject to retirement by rotation. At every Annual General Meeting (AGM), one-third of these directors are required to retire, though they are eligible for reappointment by the shareholders.

However, certain Directors are excluded from this rule.

• Independent directors.
• Nominee directors
• Directors appointed by a small shareholder.[1]

Why was this introduced?

The provision for retirement by rotation was designed to keep directors accountable to shareholders. By requiring them to step down and seek reappointment, it ensures periodic scrutiny of their performance and reinforces shareholder oversight.

What Are the Issues Today?

Over time, this rule has become more of a formality than an effective governance mechanism.

Some of the issues include:

• Minimal impact on accountability: In most cases, directors who retire are immediately reappointed, rendering the process largely symbolic.
• Uncertainty for MDs/WTDs: Managing Directors (MDs) and Whole-Time Directors (WTDs), who are usually appointed for fixed terms, are sometimes made to retire by rotation even before their tenure ends—disrupting business continuity.
• Governance loophole: In companies where most board members are independent directors (who are not subject to rotation), only one or two directors fall under this provision, creating an imbalance in governance.

SEBI’s Proposed Reform

The Securities and Exchange Board of India (SEBI), through its 2023 consultation paper and subsequent amendments to the listing regulations, has proposed a fresh approach to board accountability. Under the new framework, all directors of listed companies must seek shareholder approval at least once every five years.

Further, any director who has not been reapproved by shareholders since April 1, 2019, will be required to obtain such approval at the first general meeting held after April 1, 2024. This reform is intended to curb indefinite tenures and strengthen oversight of company boards.

RPT Violations and Director Disqualification.

What are related party transactions?

A related party transaction refers to any business dealing between a company and individuals or entities connected to it such as its directors, their relatives, or organizations in which they hold an interest. While not inherently problematic, these transactions carry the risk of conflicts of interest and may result in unfair advantages if not carefully regulated and disclosed.

The Current Disqualification Rule

Section 164(1)(g) of the Companies Act, 2013 provides that a person shall be disqualified from being appointed as a director if they have been convicted for violating Section 188, which governs related party transactions, within the last five years.

What changed in 2020?

In 2020, the government amended Section 188 of the Companies Act and removed the provision for criminal liability. As a result, directors violating related party transaction (RPT) rules are now subject only to monetary penalties, not criminal prosecution. This amendment inadvertently created a legal gap since convictions under Section 188 are no longer possible, the disqualification clause under Section 164(1)(g) has become ineffective. In other words, directors who breach RPT rules can no longer be disqualified, as the basis for conviction has been eliminated.

The Problem with this gap

This legislative mismatch undermines corporate governance in several ways:

• Limited consequences: Directors can commit serious violations and remain in office, facing only financial penalties.
• Weakened accountability: The law sets a lower standard of responsibility for corporate leaders.
• Regulatory inconsistency: Listed company directors enjoy more leeway under the Companies Act, even though they are subject to stricter SEBI regulations, creating an uneven governance framework.

The role of SEBI

SEBI’s listing regulations also govern related party transactions in listed companies. If a director violates these rules, SEBI can impose penalties under the SEBI Act, 1992. However, such penalties do not trigger disqualification under Section 164(1)(g) of the Companies Act, as the provision does not recognize SEBI’s penalties as a basis for disqualification.

Proposed reform.

To address this gap, Section 164(1)(g) should be amended to provide for:

• Disqualification in case of monetary penalties imposed under Section 188 for related party transaction violations.
• Disqualification in case of penalties or convictions imposed under the SEBI Act for RPT violations in listed companies.

This amendment would align corporate accountability with both Companies Act and SEBI regulations, ensuring directors cannot evade consequences through regulatory loopholes.

Why do these reforms matter?

These reforms modernize India’s corporate governance by ensuring directors face periodic shareholder scrutiny and broadening accountability measures. They close legal loopholes, strengthen oversight, and bring the framework closer to international standards.

Conclusion.

The Companies Act forms the backbone of India’s corporate governance. Updating outdated provisions such as replacing retirement by rotation with a five-year shareholder approval rule and expanding disqualification to cover monetary penalties for RPT violations will streamline board processes and strengthen director accountability. Once implemented, these reforms will provide clarity, close existing loopholes, and reinforce investor confidence in India’s corporate framework.

[1] As per Rule 7 of the Companies (Appointment and Disqualification of Directors) Rules, 2014.