Stakeholder Inclusion in India: Promise, Pitfalls, and the Reality of Section 166(2)

In 2013, India mandated compulsory Corporate Social Responsibility (CSR) spending for companies and by embedding stakeholder inclusion into the very heart of its corporate governance law. At the centre of this bold legislative experiment is Section 166(2) of the Companies Act, 2013—a provision that, on paper, requires company directors to act not just in the interests of shareholders, but also of employees, the community, and the environment. But has this legal innovation really transformed Indian boardrooms? Or is it more a case of progressive rhetoric than practical reform? Our recent paper on this Indian experiment with stakeholderism examines these questions.

To understand the significance of Section 166(2), we need to revisit a century-old debate in corporate law: Should companies exist solely to maximize shareholder profits, or do they have broader responsibilities to society? Milton Friedman, the famous economist, argued that a company’s sole purpose is to increase profits for its shareholders. In contrast, R. Edward Freeman’s “stakeholder theory” posits that companies thrive when they consider the interests of all those affected by their actions—employees, customers, suppliers, and the wider community.

This debate isn’t just academic. It shapes how companies behave, how directors make decisions, and ultimately, how wealth and power are distributed in society.

India’s Companies Act, 2013, marked a dramatic shift in this debate. For the first time, Indian law required company directors to act “in the best interests of the company, its employees, the shareholders, the community, and for the protection of environment.” This was a radical departure from the older Companies Act of 1956, which, like most corporate laws worldwide, focused almost exclusively on shareholders.

The new law drew inspiration from both Indian and international sources. Gandhi’s philosophy of trusteeship, which advocates that wealth should be used for the public good, provided a moral foundation. Meanwhile, global trends—like the World Economic Forum’s Davos Manifesto—were pushing companies to think beyond profits and embrace a broader social purpose.

Section 166(2) was widely celebrated as a progressive step. It seemed to signal a new era in which Indian companies would be held accountable to a wide range of stakeholders, not just their owners. The hope was that this would lead to fairer, more responsible business practices—benefiting workers, communities, and the environment.

But as the dust settled, legal scholars and practitioners began to ask a crucial question: Is Section 166(2) truly enforceable, or is it just a well-meaning gesture? Despite its lofty ambitions, this paper argues that Section 166(2) faces serious challenges that limit its effectiveness:

No Clear Hierarchy of Interests: The law tells directors to act in the best interests of multiple groups, but doesn’t say whose interests should come first when they conflict. Should a director prioritize workers’ welfare over shareholder returns? What if environmental protection clashes with profitability? The law offers no answers, leaving directors to make tough calls without clear guidance.

Vague Standards: The phrase “best interests” is open to interpretation. Without precise definitions, directors have broad discretion to justify almost any decision. This vagueness makes it difficult to hold directors accountable if stakeholders feel their interests have been ignored.

Concentrated Ownership: In India, most large companies are controlled by families or dominant shareholders who appoint the board. These majority owners are unlikely to challenge directors who favor their interests, even if other stakeholders are harmed. This power structure means that, in practice, directors are still incentivized to prioritize shareholders above all else.

Weak Enforcement: Perhaps the biggest problem is enforcement. While the law gives stakeholders a seat at the table in theory, it doesn’t provide them with effective tools to challenge directors’ decisions in court. Employees, communities, or environmental groups have little practical recourse if they believe their interests have been sidelined.

The result is a law that looks impressive on paper but is difficult to enforce in practice. Section 166(2) may have changed the language of corporate governance, but it hasn’t fundamentally altered the balance of power in Indian boardrooms. Directors still answer primarily to shareholders, and other stakeholders remain largely dependent on the goodwill of management.

This isn’t to say that the law is meaningless. By embedding stakeholder language in the Companies Act, India has set an important normative benchmark. It signals to companies, regulators, and society that business should serve a broader purpose. Over time, this could influence corporate culture and expectations, even if the legal teeth are currently lacking.

What would it take for Section 166(2) to fulfil its promise? The answer lies in both legislative and institutional reform. Lawmakers could clarify how directors should resolve conflicts between stakeholders, perhaps by requiring explicit consideration of certain interests or by setting up independent stakeholder committees. Enforcement mechanisms could be strengthened, giving stakeholders a real voice in governance and access to legal remedies.

At the same time, cultural change is needed. As Indian society becomes more attuned to issues like environmental sustainability and social justice, pressure may grow on companies to live up to the spirit—as well as the letter—of the law.

Section 166(2) of India’s Companies Act, 2013, represents a bold attempt to redefine the purpose of the corporation in the world’s largest democracy. While the provision is rich in symbolism, its practical impact remains limited by ambiguity, weak enforcement, and entrenched power structures. For India—and for other countries watching closely—the challenge is to move from aspirational language to actionable reform, ensuring that stakeholder inclusion becomes a lived reality rather than a legislative ideal.

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Arjya B. Majumdar is a Professor at O.P. Jindal Global University (JGU).

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This blog is based on a paper presented at the Asian Corporate Law Forum (ACLF). Visit the event page to explore more conference-related blogs.

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