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Role of SEBI As Regulator in Maintaining Corporate Governance Standards in India
Role of SEBI As Regulator in Maintaining Corporate Governance Standards in India
Introduction
In the aftermath of corporate scandals and scams leading to collapse of corporate entities in
turn financial system of the nation due to bad governance, the need for good corporate
governance was felt. Today there is greater need for the observance of standards of
governance for protecting and safeguarding the interest of stakeholders across the world and
India is not an exception. Corporate governance is felt as an important mechanism for
sustainable business practices than ever before in the corporate management history.
All the stakeholders of company -shareholders, board of directors, Management, employees,
investors, consumers, regulators and suppliers have rights as well as responsibilities in
making the companies to comply with the corporate governance and thereby reducing the
corporate scams, scandals, crimes in the economy. Corporate governance legal frame work
plays a pivotal role in this endeavor. In India, SEBI established in 1992 as a regulator and
watch dog has pivotal role and responsibility in enforcing corporate governance practices on
corporate entities.
Conceptual clarity
Governance: “Governance is the manner in which power is exercised in the management of
a country’s social and economic resources for development. Governance means the way
those with power use that power.” (ADB)
Besides these the Confederation of Indian Industries (CII) alignment with the corporate governance norms as required
has developed and issued corporate governance code for under the new companies Act, 2013. Again this clause also
Indian companies. entails the details about the compliance of these norms by
The SEBI Act, 1992 has conferred upon SEBI wide a range all listed companies. Further, the provisions of this proposed
of powers and authority to monitor the compliance of amended clause are also applicable to other listed entities
Governance Standards by Indian companies and also to which are not companies but are body corporate or subject
punish such companies for non-compliance to standards of to regulations under other statues (e.g. banks, financial
corporate Governance. In this direction SEBI has taken institutions, insurance companies, etc.). The amended clause
number of initiatives to ensure compliance of companies to 49 has 11 sub clauses containing the provisions of
the norms of Corporate Governance. This paper tries to compliances under Corporate Governance Norms.
analyze the pillars/elements of effective corporate The requirements under Clause 49 of listing agreement state
governance, corporate governance legal frame work in India the role of SEBI in maintaining the standards of corporate
and the SEBI initiatives to align with the global standards on governance are
corporate governance adopted in advanced economies.
Corporate governance principles [clause 49 (i)]
Pillars of Effective Corporate Governance Under this section SEBI specifies and explains the rights of
The important elements of good Corporate Governance are: shareholders and other stake holders, the duty of a corporate
Transparency to protect stakeholders’ interests, duty and responsibilities of
the board. This specifies that the disclosures must be made
Accountability regarding proper compliance of prescribed standards of
Disclosure accounting, financial and non- financial disclosure and be
Equity transparent
Fairness
Rule of Law Board of Directors [clause 49 (ii)]
This sub-clause specifies the composition of board,
Participatory inclusion of restrictions on independent directors, the tenure
of independent directors, corporate code of conduct and
SEBI Role in Corporate governance whistle blowing policy.
To make corporate governance more effective the SEBI
since its setup in 1992 has taken up number of initiatives, Board Composition: This sub-clause specifies optimum
appointed various committees and has brought amendments composition of BOD where at least 50% of board members
to the Clause 35B and the Clause 49 of listing agreement. are non-executive directors and there must be one women
Here the SEBI’s role in corporate governance is illustrated director in the board. Again it states that if the Chairman is
through norms and provisions as stated these two clauses; an executive director, half the Board must comprise of
the Clause 35B and the Clause 49 of listing agreement. Independent directors. However if the Chairman is a non-
SEBI norms and guidelines under Clause 35B and 49 of the executive director then 1/3rd board members be independent
listing agreement for effective Corporate Governance: directors.
Since its establishment, SEBI has taken initiatives to align
Indian corporate governance practices with the global Restrictions on independent directorship: Under the
standards adopted in advanced economies. The recent Revised Clause, no person can be an independent director of
amendments to Clause 35B and 49 of the listing agreement more than seven listed companies. If any person is serving
make Governance more effective and rigorous in protecting as a whole time director in any listed company, then he/she
the interest of all stakeholders. The amended Clause 49 of shall not be the independent director of more than three
listing agreement is in alignment with the new Companies listed companies
Act, 2013. This clause is applicable to listed companies but The tenure of independent director will be five years which
as per SEBI clarification, in future this clause will be is in accordance with provisions of new Companies Act,
applicable to non-listing companies also. 2013.
The proposed amendment to clause 49 of listing agreement
Clause 35B also contains drastic modifications regarding the non-
Under the revised clause 35B, the issuer has agreed to executive directors’ compensation and disclosures
provide e-voting facility in respect of all shareholders'
resolutions, to be passed at General Meetings or postal Code of conduct: As per the proposed revision to this
ballot facilities to share holders. The company has to send clause the BOD are responsible to lay down a code of
notices of meeting to all members, auditors of the company conduct for all the Board members and senior management
and directors by POST or Registered e-mail or Courier and of the company and this should be displayed in the official
the same be placed on the official website of the company. website of the company.
The notice of meeting should also mention that the company
is providing facility for voting by electronic means and Whistle blowing: Whistle blowing policy will become
postal ballot facilities to members. mandatory under the revised clause49 of listing agreement
Through this provision large number of shareholders can and will be a drastic step in maintaining the standards of
participate in the selection of board members. corporate governance. This sub-clause gives protection to
person who makes public the misconduct, frauds, illegal
Clause 49 and sub-clauses activity and misappropriations in the company.
Corporate governance Norms as stated in the proposed
amendment to Clause 49 of listing agreement are in
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Audit committee [clause 49 (iii)] Under This sub-section the corporate entities are required to
As per this, amended, clause the audit committee should provide information on appointment, reappointment of
have at least 3 members and out of which 2/3rd members be directors and their resume to shareholders.
independent directors. All the members must be financially Then material facts on proceeds from public issue, rights
literate and one member must be an expert in accounting or issue, and preferential issues must be disclosed
related financial management. This committee has to sit at
least 4 times in a year with a gap of not more than four Certification from Chief Executive Officer (CEO) and
months in between two meetings. Through this amendment, Chief Finance Officer (CFO) [Clause 49 (ix)]
SEBI specifies the powers, role and responsibilities of audit Under this sub-clause Board of Directors and Chief
committee members. Executive Officer and Chief Finance Officer are made more
accountable and responsible. They must certify that they
Nomination and Remuneration committee [clause 49 (iv)] have reviewed the financial statements and the cash flow
There should be minimum of 3 members in the nomination statements to the best of their knowledge. Then they have to
and remuneration committee and all members be non- certify that the Company hasn’t entered into any transaction
executive directors and half of them be independent which is a violation of Company’s Code of Conduct, illegal
directors. This clause states the role of the Committee which or fraudulent to the best of their knowledge. Again it will be
includes formulation of criteria to evaluate Independent their duty to inform the Auditors and Audit committee on
directors, policy devising on Board diversity, identifying any significant changes made in internal control over
prospective directors and senior management in accordance financial reporting, changes in accounting policies, cases of
with the criteria laid down, recommendation to the Board significant fraud that they have come across.
policies relating to remuneration of directors and other
employees including key managerial personnel. Compliance Certificate on Corporate Governance
[clause 49 (x) and (xi)]
Requirements W.R.T. subsidiary companies [Clause 49 SEBI, under the amended clause 49 of listing Agreement,
(v)] requires corporate to obtain the Compliance Certificate on
This sub-clause specifies the responsibilities of listed and Corporate Governance from the Auditor of the Company or
unlisted subsidiaries of listed holding companies. Provisions from a Practicing Company Secretary. Such certificate shall
as to unlisted subsidiary company: (a) at least one become separate part of Annual Report. Certificate is also to
independent director of the holding company should be be submitted to Stock Exchange along with the Annual
director on the board of Director of materially un-listed Report.
Indian subsidiary company, (b) the audit committee of the
listed holding has to review the financial statements Conclusion
materially un-listed Indian subsidiary company. Today corporate governance is an essential tool and
mechanism for the very survival and success of corporate in
Risk management [Clause 49 (vi)] the new economic environment. No doubt at all, in this
Under this clause SEBI makes it an obligation of BOD of vibrant volatile economic environment, the market
the top 100 companies by market capitalization to constitute Regulator SEBI has greater role and power to make
the risk management committee and has to determine its companies to follow the corporate governance standards but
role and functions and delegate powers as it may deem fit. it alone cannot enforce and monitor the compliance to
As per SEBI regulations this committee should consists of corporate governance standards companies. It is the duty
Board members. Senior Executives may become the and responsibility of all the stakeholders to ensure that the
member of the Committee but the Chairman of this corporate governance norms are followed by the companies
Committee shall be a member of Board of Directors. in their operations. It is needed to create awareness among
the shareholders and other stakeholders on corporate
Related party transactions [Clause 49 (vii)] governance norms and practices. Then the corporate entities
This requires the companies to place periodically, in should adopt ethical business practices.
summary form, before the audit committee all the
information on the related party transactions in the ordinary References
course of business. 1. Tarun Khanna, Krishna G Palepu. Convergence in
corporate governance in Indian software: Evidence
Disclosure Norms [Clause 49 (viii)] from Infosys and the Indian Software Industry, Journal
Disclosure norms will be more stringent than ever before of International Business Studies. 2004; 35(6):484-507.
under the proposed revision to clause 49 of the listing 2. Ghosh DN. Corporate Governance and Boardroom
agreement. Politics, Economic and Political Weekly. 2000;
Under the revised clause, quarterly report disclosing details 35(46):4010-4014.
on all material facts related party transactions along with
compliance report on Corporate Governance be disclosed on
3. Ruth V. Aguilera and Gregory Jackson. The Cross-
National Diversity of Corporate Governance:
its website and a web link stated in its annual reports.
Dimensions and Determinants, The Academy of
Again details as to any change in the accounting treatment
Management Review. 2003; 28(3):447-465.
used in financial statements, all information on the
remuneration of Directors, directors’ relationship with the 4. Madhav Godbole. Corporate Governance: Myth and
company are be disclosed along with the annual report. Reality, Economic and Political Weekly. 2002;
37(30):3094-3102.
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