When Compliance Becomes Performative: India’s Zombie Corporate Governance Problem

I. The Illusion of Compliance in Modern Corporate Governance

With the failure of IL&FS and the unravelling of Yes Bank, India found not the lack of compliance but rather the presence of compliance in the midst of a vacuum of governance. In every case of an Indian corporate crisis, post-facto analysis has shown the same pattern – every committee was there, every document was disclosed, and every governance checkbox was ticked. But oversight did not exist.

In the past decade, India’s corporate regulatory framework has come a long way. The Companies Act, 2013, contains important corporate section 149(6) on independent directors and Schedule IV, which sets out the code of conduct for independent directors. These provisions, alongside the disclosure requirements of Regulations 17, 18, 19, 21, and 34 of the SEBI LODR Regulations, 2015. The adoption of the SEBI BRSR framework further reflects India’s evolving disclosure expectations. Together, these measures establish a formally robust corporate governance structure.

Yet governance lapses persist despite the presence of independent directors, board committees, compliance filings, and all required disclosures as per law and regulations. Repeated governance failures highlight a serious disparity between what is stated and what happens behind closed doors.

This may be attributed to a phenomenon referred to as “zombie compliance”. “Zombie compliance” refers to an instance where corporations ensure that all processes and procedures required by law have been put in place, but in practice, this is not what actually happens. These are hollow rituals and procedures that have no substance.

The purpose of independent directors, compliance, and disclosures is for them to serve as meaningful oversight mechanisms. When governance is reduced to procedural satisfaction rather than substantive oversight, legal compliance becomes institutionally hollow.

II. Zombie Compliance: Form Without Function

Corporate compliance is intended to promote transparency, oversight, risk management, and shareholder protection. India’s governance framework includes, by means of the Companies Act, 2013, corporate governance, reporting, and disclosure obligations according to SEBI (Listing Obligations and Disclosure Requirements) Regulations, as well as audit committees, nominations and remuneration committees, and independent directors. The structure is formed by provisions like section 177 (Audit Committee), section 178 (Nomination and Remuneration Committee), section 149(4), and LODR disclosure requirements for board evaluation, risk management, and corporate governance.

When this occurs, we deal with zombie compliance, where legal compliance exists without substantive accountability.

Zombie compliance has several manifestations. First, independent directors may be nominated but act passively and never interfere with management actions. Secondly, an audit committee may exist, but it does not really oversee the company’s activities. Thirdly, disclosures of environmental, social, and governance factors can take the shape of routine and standardised statements that fail to disclose the actual problems with corporate governance.

A. The Formality–Functionality Gap Test

To identify zombie compliance, this piece proposes a three-criterion framework that distinguishes between the formal existence of governance mechanisms and their substantive functioning:

1. Structural existence: Governance entities like committees and independent directorships are formally established.
2. Operational engagement: These institutions actively question management, gather relevant information, and record dissent.
3. Accountability outcomes: They manage to identify governance risks and mitigate them.

Zombie compliance emerges when only the first criterion is fulfilled. Zombie compliance reveals the dangers of a gap between compliance practice and the essence of compliance.

Zombie compliance is not just a theoretical problem; it manifests in different ways in India’s corporate governance system. Regulatory compliance is often a mere formality that lacks real accountability.

B. Nominal Independence of the Board Members

According to Indian law, independent directors’ duties involve bringing objectivity to decision-making procedures, conducting independent analysis, and protecting the company from managerial influence. The Companies Act, 2013, Schedule IV, lays down the Code for Independent Directors, requiring financial statements, managerial performance, objective judgement, and stakeholder protection.

The reality differs significantly from the legislative vision of corporate governance. Nomination independence does not necessarily imply independence of action. In many instances, independent directors may be ignorant of operations and therefore fail to add value to board discussions. There have been several high-profile instances in which independent directors have resigned after raising concerns about inadequate information being provided to the board. For instance, in 2022, three independent directors of PTC India Financial Services Ltd resigned amid allegations of corporate governance lapses, with one director specifically citing the lack of appropriate information and the poor quality and delayed flow of information to the Board.¹

C. Informational Formalism in Corporate Reporting

A second manifestation is increasing informational formality in corporate disclosures. Instead, many firms prepare so-called boilerplate disclosures, which are filled with standard phrases, general commitments, and promises, leaving no traces of actual activities and practices.

Consequently, when companies prefer appearances to content in their disclosures, such documents cease to serve informative purposes and become part of the firm’s image-building strategy. Indeed, according to the information-theoretic approach to disclosure, corporate reporting functions primarily to reduce information asymmetry between internal management and external investors, ensuring that disclosed data contains sufficient decision-useful substance to enable accurate market pricing rather than merely serving as boilerplate noise. The quality of information is critical for making informed decisions. The failure to disclose relevant data undermines the purpose of the whole process.

D. Formality of Audit and Risk Committees

The third sign of zombie compliance concerns audit and risk management committees. SEBI Listing Obligations and Disclosure Requirements Regulations, 2015, Regulations 18, 19, and 21 require that the audit committee and nomination and risk management committee, all of which are intended to function as substantive oversight mechanisms rather than procedural formalities.

IL&FS bankruptcy is an example of zombie governance. Even before its bankruptcy in 2018, the board at IL&FS was compliant, with several experienced directors working within well-established audit and risk committees. Nevertheless, the SFIO Investigation Report concerning IL&FS findings by the Ministry of Corporate Affairs pointed to the failure of IL&FS to monitor its debt and intra-group exposure and recognise its liquidity crisis promptly.

Doctrinally, such an event is significant, as there were committees in place, their meetings took place, and the company made the necessary formalities. However, governance systems did not work to identify growing risks.

E. Board Capture by Promoters and Management

Board capture offers another manifestation of zombie compliance. Yes Bank is another example of zombie governance, as, despite formal compliance with board composition requirements, recurring instances of under-reporting, evergreening of bad loans, and severe divergence in non-performing assets classification identified by the Reserve Bank of India at Yes Bank raised major governance concerns regarding risk identification practices by the company.

Given the presence of concentrated decision-making power among the top management, the existence of the formal board of directors, despite compliance with section 149(6), proved to be futile in generating actual dissent and opposing excessive lending.

Thus, while the provision of the Act is sufficient in terms of compliance, without actual functional independence, there is no actual oversight.

III. Why Do Zombie Compliances Persist?

Zombie compliances continue due to several structural and normative reasons. Firstly, corporate cultures tend to have incentives for avoiding substantive oversight. This can involve posing uncomfortable questions, performing thorough internal checks, and challenging the decisions of management. By fulfilling all procedural requirements but refusing to look too deeply into how internal processes work, companies are able to maintain an impression of regulatory compliance.

Secondly, disclosure-based regulation also contributes to this problem. The system of corporate governance established under SEBI tends to assume that greater transparency implies greater accountability. Yet, in practice, disclosure-based regulation can succeed in generating accountability only if what is disclosed is specific, intelligible, and scrutinisable.

The inherent structural limitations of the Indian disclosure-based governance system have also been pointed out by the Securities and Exchange Board of India Committee on Corporate Governance (Kotak Committee), headed by the renowned Mr Uday Kotak. This Committee stressed the point that corporate governance must go beyond mere compliance and highlighted the need for improved board evaluation processes, disclosure quality, and institutionalisation of governance accountability within listed companies. This approach recognises the reality that the efficacy of governance does not depend solely upon the existence of a structure of governance but on the actual oversight exercised, independent decision-making, and scrutiny carried out by the boards. It is apparent from the zombie compliance phenomenon that although many of these improvements have been embedded into the regulatory architecture itself, their substantive incorporation is still far away.

Third, a lack of proper substantive implementation of governance guidelines allows corporations to comply with the formalities of the law while ignoring their substantive responsibilities. Generally, the regulatory bodies concentrate on verifying whether corporations comply with the formalities of the law. Whether such actions are effective tends to receive considerably less attention.

Lastly, the hierarchical corporate culture common to Indian boardrooms discourages independent criticism of company practices. Independent directors often find it difficult to openly criticise promoters or senior executives within company hierarchies, especially given that they constitute promoter-driven organisations.

IV. The Consequences: Why This Matters

There are numerous implications of zombie compliance that affect investor confidence, regulation, and market dynamics as a whole. Compliance zombies are important because they could lead to results that go far beyond the immediate failure of the enforcement of a disclosure requirement. Where there is a formal obligation for disclosure but this fails to be carried out effectively or at all, then there will be insufficient information provided to the investors, making it harder for them to understand the risks involved and make informed decisions. It is possible that over time the difference between the formal regulatory requirement and its actual implementation will undermine the confidence of the investor community and provide a basis on which there will be an impression that the rules of the market have no meaningful impact. Such loss of trust goes beyond mere investors since it could actually damage the credibility of the entire regulatory structure in the case of repeated non-enforcement of compliance obligations.

V. Reform of the Corporate Governance Model in India

To combat the phenomenon of zombie compliance, the focus should not be on increasing the number of regulatory requirements. India’s current regulatory regime is sufficiently extensive. Hence, its primary task is to ensure the effectiveness of already functioning instruments and mechanisms.

The process of evaluating compliance with the regulation should be changed. It is no longer enough to confirm the formation of committees, the submission of relevant documents, and the holding of regular meetings. Instead, the effectiveness of the existing governance models and mechanisms should be assessed using qualitative indicators.

Secondly, it is crucial to address the issue of the independence of corporate directors. It is important to develop additional means to achieve true functional independence. In particular, the selection procedure needs to be improved to avoid the influence of promoters on the appointment of independent directors. The latter should also enjoy the right of access to information, as well as formalised protection in case their dissent is expressed.

Third, disclosure standards must be raised. Currently, too much focus is placed on the scope of the reporting. Greater concern for the quality of the reporting. It is important that the reports give information about the issues faced and what actions the company took to solve them. The quantity of information is no replacement for transparency.

Fourthly, the corporation should be subjected to periodic independent external evaluations by the board. Self-assessment is unlikely to reveal the deficiencies of the corporation’s governance structure because of inherent bias. Therefore, it is crucial to engage outside specialists to conduct an objective assessment of the situation and point out problems.

Such a comparative governance framework holds valuable lessons in this matter. In the UK, the UK Corporate Governance Code requires periodic external facilitated evaluations of the board performance of FTSE 350 companies. It emphasises the importance of evaluating board performance on substantive issues rather than procedural compliance alone. Likewise, in the US, the governance standards required by the NYSE Corporate Governance Standards lay emphasis on the engagement of directors in active discussion and the conduct of performance review sessions.

Finally, and perhaps most importantly, the reform of corporate governance should be accompanied by cultural transformation. Unless the corporation’s corporate culture fosters dissent and encourages scrutiny, the very idea of good corporate governance fails. Ultimately, good governance cannot be achieved by filling in templates.

VI. Conclusion: Checklist Governance versus Substantive Accountability

Indian corporate governance rules are not at all deficient. However, repeated examples of poor corporate governance practices show that mere legal regulation does not suffice for overseeing corporate activities.

Zombie compliance stems from the institutional tendency to meet legal requirements through formal compliance. Committees are established, and independent directors are hired, but the goal of these practices is never fully met. When the process of compliance starts to outweigh compliance itself, the entire meaning of regulation will lose its significance.

A fundamental change of approach is required. The idea of corporate governance should not remain at the checklist level only but should be based on a functional model. Regulators, corporations, and their boards need to realise that corporate governance is about substance, not procedure.

The solution to governance problems in India cannot lie in further strengthening compliance rules; it should be found in reasserting the substantive significance of compliance itself. The future success of governance in Indian corporates cannot be based on better checklists but only on the power of law to make boards deliberate, challenge, and dissent.