Corporate governance for Indian private companies: Building a practical board
Corporate governance for Indian private companies is often treated as an afterthought until investors insist on formal structures. This post is for promoters, founders and early investors who want to build a practical, value adding board and governance framework without importing unnecessary listed company complexity.
Why governance matters long before a listing
Corporate governance for Indian private companies is not just a compliance exercise. Good governance:
1. Improves decision making by bringing diverse perspectives into the boardroom.
2. Helps founders separate strategic discussions from day to day operations.
3. Builds trust with investors, lenders and key partners.
4. Reduces the risk of disputes among promoters and shareholders.
A private company that instals basic governance early will find it much easier to scale, raise larger rounds and eventually consider listing.
Related: Governance checklist for Indian startups between seed and Series B (link: /blog/governance-checklist-seed-series-b)
Designing the board for an Indian private company
The heart of corporate governance for Indian private companies is the board of directors. A thoughtful board design considers size, composition and functioning.
Board size and composition
- Keep the board small enough to be nimble but large enough to bring in external views. A typical starting size is 3 to 5 directors.
- Include a mix of founder directors, investor nominee directors and at least one truly independent director once the company reaches a meaningful scale.
- Align board seat rights in shareholder agreements with the long term ownership structure.
Role clarity between board and management
- The board focuses on strategy, risk oversight and major approvals.
- Management runs operations within the framework and budgets approved by the board.
- Avoid using board meetings as operational status updates. Circulate written reports and use the meeting time for discussion and decisions.
Related: How to run effective board meetings in Indian private companies (link: /blog/effective-board-meetings-india)
Committees and internal controls in private companies
While many committee requirements in India formally apply to listed companies, voluntary committees can strengthen corporate governance for Indian private companies as they mature.
Common committees to consider:
1. Audit or risk committee: Reviews financial statements, controls and key risks.
2. Nomination and remuneration committee: Looks at senior hiring, compensation and succession planning.
3. ESG or sustainability committee: For companies where environmental and social impact is material.
Internal controls to prioritise:
- Clear delegation of authority matrix documenting who can approve which transactions.
- Maker checker controls for payments and contracts.
- Periodic internal reviews of related party transactions.
External reference: Listed company committee requirements under SEBI LODR Regulations are available on https://www.sebi.gov.in and can be used as a reference point.
Handling related party transactions in Indian private companies
One recurring theme in corporate governance for Indian private companies is the management of related party transactions (RPTs). Poorly documented or unfair RPTs can create friction among shareholders and trigger regulatory issues at a later stage.
Practical steps to manage RPTs:
1. Identify related parties: Promoters, relatives, group entities and key management personnel.
2. Create a simple register of related parties and update it annually.
3. Require all RPTs to be pre approved by the board or a designated committee.
4. Document the commercial rationale and pricing for each RPT.
5. Periodically review RPTs to ensure they remain on arm’s length terms.
Related: Template policy on related party transactions for Indian private companies (link: /blog/rpt-policy-india)
Role of independent directors in Indian private companies
Independent directors are a central feature of corporate governance for Indian private companies once they reach a certain size or prepare for listing. Appointing true independents can add significant value when done thoughtfully.
Considerations:
- Look for individuals with relevant industry experience and a reputation for integrity.
- Provide them with adequate information, including board packs circulated in advance.
- Encourage open discussion even when it challenges founder views.
- Compensate independent directors fairly, without tying their remuneration solely to short term metrics.
Independent directors should be able to call out governance concerns early and guide the company towards sustainable practices.
Making governance a habit, not a one time project
Corporate governance for Indian private companies becomes effective when it is embedded in daily behaviour.
Simple habits that reinforce governance:
1. Maintain complete and timely minutes of board and committee meetings.
2. Circulate agendas and papers in advance so directors come prepared.
3. Track action items from each meeting and review them at the next meeting.
4. Conduct annual board evaluations, even if informally, to identify areas for improvement.
5. Provide regular training and updates to directors on regulatory changes relevant to the company.
By taking these steps gradually, promoters can build corporate governance for Indian private companies that supports growth, protects stakeholders and prepares the ground for future listing without overwhelming the organisation.
