Corporate Governance And CSR Law Violation In A Large Coal Company in India.
Corporate Governance Practice Audit
* Birendra K Jha Independent Director, IICA ( Ministry of Corporate Affairs ); Corporate Governance Practice Audit; CSR Social Impact - CSR Planning & Implementation; Expert Company Law -SEBI Law - Social & Environmental Law EMail: birendrajha03@yahoo.com
The Annual Report of 2024-2025 of a large coal company in India, was submitted in the month of August 2025. By that time the Independent Directors sitting in the Board, fail to disclose large scale Corporate Governance violation covering SEBI LODR 2015 and CSR compliance. They ultimately relied on the Compliance Officer and the Secretarial Auditor. So far the SEBI or stock exchanges have not seen this major gap compliance. This points out the urgent need of developing independent judgment skill of the Independent Directors. This is missing entirely in this large scale operated coal company.
The Secretarial Audit, understates the seriousness of LODR non-compliance. He misplaced the key issues covering: Board composition violations; Audit committee invalid composition; Weak independent oversight and Group governance risks in subsidiaries. Potentially he failed to point out the serious risk covering: a) Stock exchange penalties and b) SEBI governance scrutiny. This shall cover important observation missing from the side of the Independent Directors covering Corporate Governance of SEBI LODR 2015, BRSR and CSR covered next to it.
1. Violation - SEBI LODR Regulation 17(1)(b) – Composition of Board (Independent Directors):
At least 50% of the Board should be Independent Directors where the chairperson is an executive.
Missing Judgement From The Independent Directors:
The crucial observation that is missing is several Independent Directors completed tenure on 31 October 2024 and new appointments were delayed. During Nov 2024 – to March 2025, the Board did not have the requisite number of Independent Directors. Further, there was no woman Independent Director from April 2024 to March 2025. Since, Secretarial Auditor failed to report, hence the Independent Directors also ultimately failed to note further compliance points as noted below. This is non-compliance with Regulation 17 regarding Board composition. The Secretarial Auditor, who has given poor observation in this matter has failed to highlight the following deeper regulatory implications in following important areas:
- Failed to mention continuous non-compliance almost the entire financial year.
- He failed to mention this is not merely a Companies Act issue, but a direct violation of LODR Regulation 17(1).
- He failed to disclose stock exchange penalty exposure.
- There is no warning by the Secretarial Auditor of ignorance of SEBI important circular SEBI/HO/CFD/CMD/CIR/P/2020/12. Where this circular has following consequences: Non-appointment of a Woman Director: ₹5,000 fine per day; Non-constitution of the Audit Committee: ₹2,000 fine per day; Delayed Corporate Governance Report: ₹2,000 per day; Freezing of Promoter Holdings: If a company fails to pay the levied fines or remains non-compliant, the stock exchanges are authorized to freeze the entire shareholding of the promoters; The "Z" Category & Suspension: Companies that remain non-compliant for two consecutive quarters are moved to the 'Z' Category. If Z category of non-compliance persists, trading of the scrip is suspended.
2. Violation - SEBI LODR Regulation Regulation 18(1)(b) – Composition of Audit Committee
The minimum requirement is 3 Directors, where Two-thirds must be Independent Directors.
Missing Judgement From The Independent Directors:
The Audit Committee lacked the required number of Independent Directors from 1 Nov 2024 to 28 Mar 2025. Due to absence of Independent Directors, board independence and committee oversight were weakened during the period. The Governance oversight not fully compliant with the SEBI LODR expectations. After 28 March 2025 appointment of new Independent Directors initiated. But this was too much late. The financial year closed on 31st March 2025. The Audit Committee has functioned in unconstitutional way. There is no validity of this Audit Committee in between 1 Nov 2024 to 28 March 2025. In this matter, the Secretarial Audit Gap is seen clearly. The Secretarial Audit does not analyze consequences of ignoring critical risks. It failed to look:
- Audit Committee decisions during the period 1 Nov 2024 – 28 March 2025 is procedurally defective.
- There is financial statements oversight. That has not been questioned by the Secretarial Auditor.
- Financial approval of: a) Related Party Transactions b) Internal control review c) Financial statements are technically defective and challengeable.
3. Violation - SEBI LODR Regulation 25(1) – Role and Independence of Independent Directors
Requirement: Independent Directors should form adequate representation for independent judgement.
Missing Judgement From The Independent Directors:
Between Nov 2024 to Mar 2025, the Board collapsed. The vacant position failed to provide independent oversight during this period. The impact of this violation is that, functional breach of Regulation 25 is seen with Governance Weakness. Due to shortage of Independent Directors, key committees were affected like Audit Committee; Risk Management Committee and CSR Committee. There is gap in the Secretarial Audit on this compliance. The Secretarial Auditor has failed to examine:
- Whether committees were validly constituted during the period ?
- Whether resolutions passed were legally valid ?
4. Violation - SEBI LODR Regulation 34(3) – Corporate Governance Report Disclosure
The Requirement is : Companies must disclose compliance status and deviations.
Missing Judgement From The Independent Directors:
Company disclosed the deviation regarding Independent Directors in the Corporate Governance section. But governance related compliance, none existed. This has not been disclosed.
5. Violation - SEBI LODR Regulation 21 – Risk Management Committee
Requirement: Committee composition must include majority board members and independent directors.
Missing Judgement From The Independent Directors:
The committee composition changed during the year and initially had only one Independent Director after Nov 2024, before later reconstitution. The potential issue is for a time period, committee independence is not sufficient. The Secretarial Auditor did not analyze whether the committee was compliant during the period in question or not?
6. Violation - SEBI LODR Regulation 24A – Secretarial Audit of Material Subsidiaries
Requirement: All material unlisted subsidiaries must undergo secretarial audit. This company has 6 material subsidiaries.
Missing Judgement From The Independent Directors:
Secretarial Auditor Audit report is defective and did not consolidate subsidiary governance risk at the group level
7. Violation - SEBI LODR Regulation 23 – Related Party Transactions Governance
Requirement: Audit committee and Shareholders approval needed for the RPT Transaction. Further, in Form AOC-2 (Annexure to Directors’ Report) following information is disclosed: a) Number of contracts not at arm’s length basis is mentioned Nil b) Number of material contracts at arm’s length basis is also mentioned Nil. c) Details of related party contracts – All fields marked “NA”.
Missing Judgement From The Independent Directors:
In view of the compliance requirement and the information furnished in the AOC -2 , the Independent Directors failed to judge that the financial statements clearly show transactions with related parties. There are three large transactions with the RPT. This is all missing.
The Missing disclosure is clear, the AOC 2 should disclose material RPTs even if at arm’s length when they exceed thresholds under Section 188 or require shareholder approval. Showing “Nil”. This contradicts the financial statement note.
The Secretarial Auditor Gap: The Auditor failed to analyze:
- Whether RPT threshold limits were breached or not?
- Whether Audit Committee approvals were valid during non-compliance period or not ?
There is incomplete disclosure of RPT Approval Process. The report states: Company has a policy on dealing with related party transactions. What the Independent Directors missed judgement that is mandatory under SEBI LODR Regulation 23(2) and 23(3):
- Whether Audit Committee approved each RPT
- Whether omnibus approval was granted
- Whether Quarterly review by Audit Committee is there.
- Absence of RPT Certification by Independent Directors
- SEBI LODR requires disclosure that: Independent Directors reviewed the RPTs.
Missing Judgement From The Independent Directors:
The report does not explicitly state that the Independent Directors reviewed RPTs.
8. BRSR Disclosure: BRSR disclosure is very poor. Some examples can be taken. BRSR expects material value chain coverage disclosure, especially where environmental and social impacts are significant. The Missing Judgement From The Independent Directors: BRSR gives reporting boundary on consolidated basis for this company and subsidiaries. But Joint Venture with a fertilizer company has been excluded. This is Material Gap.
Similarly BRSR Disclosure on Ethics, Transparency & Accountability is poor. There is missing details on Anti-corruption training coverage: % of employees trained, % of vendors trained and Periodicity of ethics training
Disclosure on Whistleblower is also poor. The compliance requirement is a) Policy existing or not b) number of complaints c) resolution time d ) disciplinary action. The Missing Judgement From The Independent Directors : The directors failed in giving detail disclosure. They said policy existing but no % data of complaints and other related item. The BRSR Disclosure on Sustainable Products & Lifecycle is also poor. There is Material Gap where product lifecycle environmental impact is not mentioned, the Coal lifecycle impacts are also not quantitatively disclosed, including Scope-3 emissions from coal usage; the Downstream emissions footprint not properly disclosed. There is missing on high risk for fossil based fuel companies.
9. CSR Law Violation:
The Independent Directors fail to record following two judgements on the CSR. Since CSR is a part of the BRSR disclosure hence sufficient disclosure is needed here :
a) The Legal Requirement under Section 135 – Companies Act 2013 is CSR Committee must have minimum 3 directors and at least 1 Independent Director (for listed companies). The Non-Compliant Period is : 1 April 2024 – 31 October 2024. In this period the CSR committee is un-constitutional. So entire CSR related decision is invalid.
After Nov 2024 to Mar 2025 the committee is constitutional.
b) CSR Expenditure: This was duty of the Independent Director to check whether CSR Expenditure is as per CSR Law or not ? This has not been checked. The entire CSR expenditures are defective. Since the company business operation is threatening the life of the endangered species, hence this was the duty of the Independent Directors to ensure CSR expenditure for the protection of the endangered species. An example can be given here, but before that let us check what the CSR Law is ?
In the light of the Hon'ble Supreme Court ruling in M.K. Ranjitsinh & Others v. Union of India, the Hon'ble Court held that if business operation is threatening the life of the endangered species then the CSR fund must support endangered species under the environmental law, and such spending is a constitutional obligation under Article 51A(g) and Section 135 of the Companies Act. This has been made very clear by the Hon'ble Supreme Court that the CSR is needed to be read with the Constitutional Law as mentioned under Article 51 A (g).
The Hon'ble Court is on record, that the CSR funds must include environmental protection and conservation of endangered species if business operation threatens them. “CSR funds are the tangible expression of this duty. Consequently, allocating funds for the protection of environment is not a voluntary act of charity but a fulfilment of a constitutional obligation.”
Once law is clear, then we see clearly coal mining impact of this company, through its subsidiary at the Hasdeo Arand Forest. This is one example. There may be others. This is the duty of the CSR Committee to conduct CSR Need Analysis and identify business impact areas.
The Hasdeo Arand Forest is one of the largest contiguous dense forests in central India, covering roughly 170,000 hectares and containing rich biodiversity including elephants and other protected wildlife. In this area many large industrial houses are operating with their open cast mines. The Government biodiversity assessments and conservation studies have warned that mining in this landscape could fragment habitats and intensify human–elephant conflict due to displacement of wildlife corridors. The area is part of a broader conservation plan including the Lemur Elephant Reserve, which was proposed to protect elephant habitats and reduce conflict with nearby communities. Despite this ecological sensitivity, coal blocks such as Parsa and Parsa East & Kente Basan (PEKB) have been opened for mining operations within or adjacent to these forests. The subsidiary of this company has an open cast mine here.
The area where open cast mine is situated is a passage path of the endangered elephant species which is moving towards the water reservoir, near by. The entire passage is disturbed with the presence of open cast mine. Following two satellite photographs speak plight of the situation and mass violation of the Hon'ble Supreme Court Order in CSR Fund use for not protecting and providing support to the endangered species.
Due to passage block, the elephants are in stress. This stress is exhibited through elephants attacking human and in turn human population taking retaliation action by hurting the endangered species. The four photographs speak in detail and the stress felt by the elephants.
Conclusion:
1. The Independent Directors should must look the Annual Report with Independent Judgement. They should engage expert to check it if they are not qualified. They should ensure this before signing the Annual Report.
2. The CSR Fund should must honor the law of the land. So far the CSR Law has been violated. There is no any CSR fund for the protection of the endangered species. This is violation of the CSR Law.
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