Extraterritorial Compliance with Corporate Governance Norms

[Shubham Gupta is a 4th law student at Institute of Law, Nirma University, Ahmedabad]

The Securities and Exchange Board of India (SEBI) has elucidated its position with the respect to the extra-territorial application of its corporate governance norms. In a recent informal guidance in the matter of KCP Limited, SEBI interpreted regulation 24(1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). The provision stipulates that an independent director of a listed company is to be appointed on the board of directors of an unlisted material subsidiary, whether incorporated in India or not. SEBI found that the provision needs to be adhered to extra-territorially if a foreign subsidiary’s home jurisdiction does not prohibit the compliance thereof. This post seeks to analyze the regulator’s approach towards the extra-territorial application of corporate governance norms.

Informal Guidance

KCP Limited (the applicant) sought an interpretative guidance from SEBI regarding compliance with regulation 24(1) of LODR.  KCP Limited has a subsidiary in Vietnam, namely KCP Vietnam Industries Limited (KCP Vietnam), incorporated under the laws of Vietnam. KCP Limited, in its application, has reiterated that a limited liability company incorporated in Vietnam does not need to form a board of directors. Article 55 of the Law on Enterprises of Vietnam posits that a limited liability company is not required to have a supervisor’s board unless it has more than 11 members. KCP Vietnam has 8 members and, thus, it not mandatory to form a supervisory board.

In response, SEBI stated that KCP Limited is required to comply with regulation 24(1), and that the Vietnamese Law of Enterprises does not prohibit the company, which is a subsidiary of the company incorporated in India, to form a supervisory board to run the company. SEBI has given directions to appoint an independent director of KCP Limited as a director of supervisory board of KCP Vietnam.


SEBI directions to form a supervisory board even if the foreign laws do not require it demonstrates an approach to ensure corporate compliances extra-territorially. In GVK Industries Limited v. Income Tax Officer, the Supreme Court of India held that the Parliament may exercise its legislative powers with respect to extra-territorial aspects or cause, events, things, etc., only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians. In Sahara India Real Estate Corporation Ltd. v. SEBI, the Supreme Court held:

Subsection (1) of Section 11 of the SEBI Act casts an obligation on SEBI to protect the interest of investors in securities, to promote the development of the securities market, and to regulate the securities market, “by such measures as it thinks fit”. It is therefore apparent that the measures to be adopted by SEBI in carrying out its obligations are couched in open ended terms having no prearranged limits. It is necessary to record here that the aforesaid power to adopt “such measures as it thinks fit” to promote investors’ interest has not been curtailed or whittled down in any manner by any other provisions under the SEBI Act, as no provision has been given overriding effect over subsection (1) of Section 11 of the SEBI Act.”

SEBI, a quasi-legislative body, may enforce its law if it affects the interest of the securities market in India. SEBI’s direction to form a supervisory body instead of constituting a board of directors or appointment of independent director pursuant to regulation 24 LODR seems to simulate an approach to at least create a supervisory position to comply with corporate governance norms, inter alia, the appointment of independent director. A ‘supervisory board’ generally performs supervisory functions to check the legality, accuracy and honesty in the management and administration of the company’s business activities. At the outset, this approach displays SEBI’s trajectory to streamline the flow of information between the companies, and to avoid any informational asymmetry that becomes a subject of financial irregularities in listed companies in India. This stance taken by SEBI serves as guidance for companies with material subsidiaries to ensure that corporate governance may be adhered to when the foreign laws does not prohibit the same explicitly.

Further, it is necessary to highlight that SEBI has been lenient in terms of application of the provisions of the Companies Act 2013 as compared to the LODR. In response to an informal guidance sought by HCL Technologies Limited, SEBI adopted the view that if subsidiary’s home jurisdiction does not require compliance with or obligation to get its financial statement audited, the listed company can proceed by placing unaudited financial statement on its website. However, the stance that has been taken in the present informal guidance shows a different approach when it comes to corporate governance norms.

– Shubham Gupta

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