Corporate governance constitutes the cornerstone of sustainable corporate performance, fostering trust, accountability, and transparency within organizations. In the Indian context, the Securities Exchange Board of India (SEBI) plays a pivotal role in shaping corporate governance norms and practices. This research paper explores the landscape of corporate governance in India, with a particular focus on SEBI’s interventions aimed at enhancing the reliability of the companies and transparency in their affairs. The paper begins by tracing the evolution of corporate governance norms in India, highlighting the regulatory milestones and contextual factors driving reforms in this domain. It then delves into the regulatory framework established by SEBI, examining the various guidelines, circulars, and amendments aimed at strengthening corporate governance mechanisms. Through a critical analysis of SEBI’s interventions, the paper evaluates their impact on corporate practices and investor confidence. It scrutinizes the challenges and imperatives faced by the corporate governance system in India., including issues such as relative party transactions, board independence, and executive compensation. SEBI’s responsiveness to these challenges is assessed, with a focus on measures introduced to address gaps in the existing framework and enhance regulatory effectiveness. Drawing insights from empirical studies and industry analyses, the paper offers a nuanced understanding of SEBI’s role in fostering accountability and transparency within the Indian corporate landscape. It concludes by presenting recommendations for further enhancing corporate governance practices and ensuring regulatory endurance in alignment with global standards. In essence, this research paper contributes to the discourse on corporate governance in India by shedding light on SEBI’s proactive role in shaping regulatory policy and fostering a culture of accountability and transparency within corporations. Through a comprehensive analysis of SEBI’s interventions and their impact, the paper offers valuable insights for policymakers, regulators, and corporate stakeholders striving to promote sustainable and ethical business practices in India’s dynamic economic milieu.
Keywords:
Corporate Governance, corporate practices, regulations, transparency, legal framework, capital markets
Introduction:
Corporations require funding for various purposes such as expansion, research and development, marketing, operational expenses, and strategic investments. So, they often opt for equity financing, debt financing, and other such routes of finance. They call for investments through shares, FDIs, ECBs, ADRs, GDRs, etc. Companies and corporations receive substantial investments from large investors in both domestic as well as in international capital markets. The investors place their trust in the corporation’s management’s hands along with their money. Therefore, when an investor invests his money in a corporation, he expects the management to use it wisely and carefully and act as trustees of the finances while simultaneously earning a higher rate of return than the cost of the capital. To warrant the conscientious use of the funds, it is vitally important to ensure a sturdy legal framework that not only creates an ethical and reliable corporate environment but also mitigates risks, improves capital inflow, engages the stakeholders, and builds a positive brand reputation.
Corporate governance is the bedrock upon which the edifice of trust, accountability, and transparency in the corporate sector stands. In the wake of globalization and the increasing integration of Indian companies into the global market, the need for stout corporate practices has become paramount. Over the years, India has witnessed significant reforms aimed at fortifying its corporate governance structure, with the Securities Exchange Board of India (SEBI) being a pivotal regulatory authority in this domain.
This particular research paper delves into the intricacies of the corporate governance reforms in India, with a specific focus on the role played by SEBI in fostering accountability and transparency within the corporate world. The paper endeavours to analyse the evolution of corporate governance norms in India, the hurdles encountered along the way, and the efficacy of SEBI’s interventions in addressing these challenges.
Research Methodology:
This research adopts a secondary data analysis methodology to investigate the landscape of corporate governance in India. Drawing from a comprehensive review of existing literature, regulatory documents, corporate reports, and empirical studies, the study seeks to critically examine the evolution, challenges, and impact of corporate governance reforms, with a specific focus on the role of the Securities and Exchange Board of India (SEBI).
Evolution of Corporate Governance Practices in India:
Corporate governance in India can be traced back to the 1990s when India recently had opened up its economic gates to the rest of the world by devising policies like globalization, privatization, and liberalization. A lot of legislative and non-legislative reforms have been taken up ever since to improve governance in the corporate sector.
The first corporate governance initiative in India was recommended by a committee appointed by the SEBI on corporate governance under the chairmanship of Mr. Kumar Mangalam Birla, the chairman of the Aditya Birla group, and 18 other honourable delegates from the Ministry of Finance, the Department of corporate affairs, ICAI, ICSI, SEBI, various stock exchanges, and corporate giants. This committee was formed on the 7th of May, 1999. According to the report, corporate governance is considered an important instrument of investor protection. The main objectives of this committee were:
- to suggest suitable amendments to the listing agreement executed by the stock changes with the companies and any other measures to improve the standards of corporate governance in the listed companies, in areas such as s continuous disclosure of material information (financial and non-financial), manner and frequency of such disclosure, responsibilities of independent and outside directors.
- To draft a code of corporate best practices
- To suggest safeguards to be instituted within the companies to deal with insider information and insider trading.
The committee took note of the several steps already taken by SEBI (disclosure norms regarding IPO, information in Directors’ reports about utilization of funds, declaration of quarterly results, the mandatory appointment of a compliance officer, timely disclosure of material information, etc.)
The Kumar Birla committee furnished several recommendations (mandatory and non-mandatory) regarding the Duties of the Board of Directors, the composition of the Board of Directors, a Nominee director, the role of the chairman of the Board, audit committee, etc.
Further, in 2002, the Confederation of Indian Industry set up a task force on corporate governance chaired by Mr. Naresh Chandra. The committee furnished with their recommendations concerning disqualification of the auditor, prohibited non-audit services, the appointment of auditors, setting up of an independent quality review board (QRB), independence of directors, etc.
Later in 2003, another committee was formed by SEBI presided over by Mr. Narayana Murthy, then chairman of Infosys Technologies Limited. The committee met thrice and mulled over various issues related to the audit committees, audit reports, related parties, independent directors, risk management, directorships, and director compensations, etc.
Another committee was formed by SEBI on June 2, 2017, under the chairmanship of Mr. Uday Kotak, then executive vice chairman and managing director of Kotak Mahindra Bank Limited. The report of this committee was extremely comprehensive and elaborate touching on various facets of a corporate structure and recommending various amendments and improvements in the existing corporate governance framework.
Challenges faced by the corporate governance in India:
Despite the resolute amendments and improvements in the rules and regulations, corporate governance in India has come under scrutiny because of several high-profile frauds and controversies. Corporate governance in India faces several issues such as:
- Related party transactions: lack of stringent regulations and oversight mechanisms often result in related party transactions, where insiders engage in the transactions in favour of their selfish means which may not be in the best interests of the company and consequently the investors.
- Board independence and effectiveness: Despite regulatory requisites for independent directors on the board, there are several concerns raised regarding the true independence of the directors and their effectiveness in the oversight of administrative matters. This especially is a concern in family-owned businesses where there might be conflicts of interest.
- Executive compensation: excessive executive pay and lack of transparency in compensation structures remain contentious issues, raising questions about alignment with company performance and shareholder interests.
- Shareholder activism and rights: shareholders, especially minority shareholders, may face challenges in exercising their fights and holding management accountable due to limited shareholder activism and inadequate mechanisms for shareholder engagement
- Disclosure and transparency: while there have been improvements in disclosure requirements, there are still gaps in transparency, particularly regarding non-financial disclosures such as environmental and CSR.
- Enforcement and regulatory oversight: inconsistent enforcement of regulations and weak regulatory control can undermine the effectiveness of corporate governance frameworks, leading to instances of corporate
- Risk management and internal controls: Inadequate risk management practices and internal control mechanisms leave companies vulnerable to risks such as fraud, corruption, cybersecurity, threats, and operational failures.
- Corporate social responsibility (CSR): Despite the introduction of mandatory CSR spending requirements, there are challenges in ensuring effective implementation and monitoring of CSR initiatives, as well as concerns about greenwashing and tokenism.
- Whistleblower protection: weak whistleblower protection mechanisms and fear of retaliation may deter employees from reporting misconduct, hindering efforts to detect and address corporate wrongdoing.
- Role of regulatory bodies: While regulatory bodies like SEBI play a crucial role in setting corporate governance standards, there are concerns about their capacity to enforce regulations effectively and adapt to the evolving market dynamics.
Role of SEBI in Corporate Governance:
It can be safely said that as an authority that is dedicated to the protection of the interests of the investors and the regulation and development of securities markets, SEBI has taken critical steps throughout for the fulfilment of these objectives.
The Securities Exchange Board of India has established itself as an authority that looks after the investors’ welfare while simultaneously ensuring the growth and development of securities markets by taking strict measures against corporate malpractices and laying down regulations for smooth operations of the market without any fraudulent activities. It boosts corporate restructuring and promotes investors’ well-being.
Therefore, the Board is responsible for ensuring corporate governance practices that align with the Global Corporate practices. In his speech at the Corporate Governance summit organized by the CII, the chairman of SEBI addressed the issues and questions regarding SEBI’s policies regarding corporate governance while speaking about the issues and remedies taken by the Board, the chairman said that the LODR regulations by SEBI specify the norms for corporate governance for listed companies in India and they are largely in line with the OECD principles of corporate governance. However, the Board has suitably tweaked the norms as per the domestic requirements.
SEBI’s Initiatives and Reforms:
To boost shareholder democracy and investor awareness, SEBI has amended the Listing Obligations and Disclosure Requirements Regulations, 2015. One such provision has required the top 100 listed entities (from February 1st, 2024) and the top 250 listed entities to either deny, clarify, or confirm any reported event or information circulating in the “Mainstream Media” within 24 hours. SEBI has defined “Mainstream Media” as:
- Newspapers registered with the Registrar of Newspapers for India;
- News Channels (permitted by the Ministry of Information and Technology)
- Content published by an online news portal that publishes current affairs and news (but does not include newspapers, replica e-papers of the newspaper)
- Newspapers, channels, or current affairs content regulated in jurisdictions outside India.
Another provision requires the listed entities to disclose information as set out in paragraph B of Part A of Schedule III of the SEBI (LODR) Regulations, 2015 (together with the amendments). The regulations lay down certain quantitative thresholds to determine the value or materiality of the events/ information to be disclosed.
There are other disclosures required by these regulations such as disclosure of the information that is deemed material such as Acquisitions (if they qualify under certain established standards), sale of stake in an associate company, details of agreements entered into by shareholders, promoters and promoter group entities, directors, related partied, key managerial personnel, employees of listed entity or its associate, holding, subsidiary company among themselves, with a listed company or with a third party which directly or indirectly impact management of, impose any restriction on or create any liability upon listed entity. This information is to be disclosed to the stock exchanges.
Additionally, the frauds or defaults by or arrest of directors, senior management, details of governmental and judicial actions in respect of search or seizure, re-opening of accounts investigations under the Companies Act, 2013 or in respect of suspension, imposition of fine or penalty, settlement of proceedings, etc should now be disclosed.
In Regulation 30(13) pursuant to which any communication received from Authorities (governmental or judicial) shall be disclosed unless it is prohibited by the authority. These are some of the provisions in the SEBI (LODR) Regulations.
Before the enactment of the LODR regulations, Clause 49 of the Listing Agreement prescribed corporate governance norms for listed companies. It served as the precursor for the more elaborate LODR regulations.
SEBI has issued regulations like Disclosure and Investor Protection (DIP) Guidelines to ensure the disclosure of information by listed companies to investors and they cover aspects such as financial reporting, insider trading, material information disclosure, and obligations towards shareholders.
SEBI (Prohibition of Insider Trading) Regulations, 2015, as the name suggests, prohibit insider trading by regulating related party transactions and mandating disclosures with respect to insider dealing. These regulations aim to prevent unfair practices and protect the interests of minority shareholders by ensuring a level playing field in the securities market.
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 govern the acquisition of shares and takeovers of listed companies. SEBI (Buyback of Securities) Regulations, 2018 prescribe conditions, procedures, and disclosures to be followed by the companies undertaking buyback. They ensure transparency, fairness, and investor protection in the buyback process.
SEBI has also prescribed a corporate governance code for mutual funds, outlining principles and practices to be followed by mutual fund houses in their operations and governance structures. Besides these regulations, SEBI has constituted a number of committees over time to reflect on the existing regulatory framework, give recommendations for improvements and developments of the regulations, and help them adapt to ever-evolving circumstances.
Impact of SEBI’s reforms:
- Enhanced Transparency: SEBI’s reforms and regulations have led to greater transparency in corporate disclosures and governance practices. Listed companies are required to provide timely information to investors, leading to improved market efficiency and investor decision-making.
- Strengthened Board Governance: SEBI’s regulations on board composition, independence, and functioning have contributed to strengthening board governance practices in listed companies. The requirement for independent directors and separate roles of chairman and CEO has led to more effective supervision and strategic decision-making.
- Improved accountability: SEBI’s measures have fostered a culture of accountability among corporate executives and board members. Companies are more accountable to their investors, stakeholders, and regulations for their actions.
- Increased Investor Protection: these regulations ultimately ensure the protection of investors’ interests which is the main objective of SEBI. The stringent regulatory requirements pertaining to buybacks, insider trading, and takeovers have bolstered investor protection mechanisms in the investor markets, therefore increasing the investors’ trust in the capital markets and securities.
Good corporate governance has been depicted by different corporate giants like Infosys, Tata, and HDFC Bank. Infosys, a leading It services company has been lauded for its transparent disclosure practices, strong hold of the board on the administration of the company, and its adherence to SEBI rules and regulations. It has reinforced investor confidence and contributed to its sustained growth and reputation. Similarly, Tata Group, one of India’s largest conglomerates, has consistently followed solid corporate ethics and has left its mark in the corporate world for its transparent structure and affairs. HDFC Bank is also known for its sound governance practices, prudent risk management, and ethical conduct. The governance framework of the bank has maintained the investor trust.
Case studies:
As there are examples of good corporate governance, there are examples of poor corporate governance as well. Poor corporate governance, to no one’s surprise, results in fraud, corruption, and financial mismanagement. It often only results in unethical behaviour, lack of accountability, and ultimately neglect of investors’ and company’s interests.
The effect of inept corporate governance mechanisms can be seen in the Nirav Modi and Punjab National Bank Fraud case. In 2018, Punjab National Bank (PNB), one of India’s Largest public sector banks, was embroiled in a massive fraud amounting to nearly Rs. 14000 Crore. The fraud, allegedly orchestrated by jeweller Nirav Modi and his associates, involved the fraudulent issuance of Letters of Undertaking (LoU) to obtain credit from other banks. The PNB fraud revealed governance lapses, including weak internal controls, lack of verification in the issuance of LoUs, and failure to detect and report suspicious transactions.
This case raised questions about the effectiveness of the compliance mechanisms within the banking sector.
In another famous case Ranbaxy Laboratories, which is one of India’s largest pharmaceutical companies, faced regulatory scrutiny and legal challenges over a series of quality control and compliance issues. The company was accused of falsifying data, manufacturing substandard drugs, and violating regulatory standards in various markets, including the United States [U.S. v. Ranbaxy USA Inc.]. This controversy highlighted governance failures, lack of transparency in reporting, and compromised ethical standards. The case underscored the importance of regulatory compliance and integrity in the pharmaceutical industry.
In Sahara Group and Sahara India Parivar Controversy, a conglomerate with interests in finance, real estate, and media faced regulatory scrutiny and legal battles over alleged financial irregularities and non-compliance with regulatory norms. The group’s founder, Subrata Roy, was accused of defrauding investors through illegal fundraising schemes. The case exposed governance deficiencies in terms of regulatory violations, questionable corporate governance practices, and lack of transparency in financial transactions.
DHFL (Dewan Housing Finance Corporation Limited), one of India’s largest housing finance companies, faced a liquidity crisis and allegations of financial mismanagement in 2019. The company defaulted on its debt obligations, triggering concerns about its solvency and governance practices. This case raised issues like inadequate risk assessment, lack of transparency in financial reporting, and questionable lending practices.
There are a number of other cases like the Infrastructure Leasing & Financial Services (IL&FS) Crisis where the infrastructure company faced a severe liquidity crisis in 2018 leading to default in its debt obligations and triggering panic in the financial markets. One of India’s largest private sector banks, Yes Bank faced a series of governance and financial issues culminating in a crisis in 2020 which led to deterioration in its financial health.
CG Power, an engineering and power solutions company in India was embroiled in a financial scandal in 2019 involving irregularities in its financial statement wherein the company’s management was accused of inflating revenues, understating liabilities, and misappropriating funds. The NSEL scam which came to light, involved alleged fraud and mismanagement at the national Spot exchange, a commodities trading platform in India. The exchange defaulted in payments to investors, leading to widespread losses and regulatory investigations.
These examples highlight the loose hold on corporate governance and the ineffectiveness in enforcement of the regulatory guidelines of corporate governance.
Conclusion:
The evolution of corporate governance norms in India reflects a trajectory marked by resilience, adaptability, and continuous improvement. From the early stages of liberalization to the present era of heightened regulatory scrutiny, Indian companies have navigated through challenges and embraced reforms aimed at aligning their practices with global standards. SEBI, as the vanguard of regulatory oversight, has played a pivotal role in steering this transformation by enacting regulations, enforcing compliance, and fostering a culture of transparency and accountability.
The regulatory framework established by SEBI encompasses a wide array of governance principles, covering board structure, disclosure requirements, shareholder rights, and ethical conduct. The impact of SEBI’s interventions on corporate governance outcomes has been profound, albeit with challenges and areas for further improvement. Empirical evidence suggests that SEBI’s regulations have led to improvements in board composition, transparency levels, and disclosure practices across Indian corporations. However, challenges such as related-party transactions, board independence, and executive compensation remain areas of concern, necessitating continued vigilance and regulatory intervention.
Looking ahead, the journey towards enhancing corporate governance in India is likely to be characterized by evolving regulatory frameworks, technological advancements, and shifting stakeholder expectations. SEBI, as the torchbearer of regulatory oversight, must continue to adapt and innovate in response to emerging challenges and dynamics in the corporate landscape.
In conclusion, corporate governance reforms in India and SEBI’s role therein represent a paradigm shift towards a more accountable, transparent, and investor-friendly corporate ecosystem.
References:
- Mr. Kumar Mangalam Birla Comm., Report of Kumar Mangalam Birla Committee on Corporate Governance, sebi-data (May 7, 1999), https://www.sebi.gov.in/sebi_data/commondocs/corpgov1_p.pdf
- Report of the CII Task Force on Corporate Governance, (Nov. 2009) https://www.mca.gov.in/Ministry/latestnews/Draft_Report_NareshChandra_CII.pdf
- Mr. Narayana Murthy Committee, Report of the SEBI committee on corporate governance, (Feb. 8, 2003) https://www.sebi.gov.in/reports/reports/mar-2003/the-report-of-shri-n-r-narayana-murthy-committee-on-corporate-governance-for-public-comments-_12986.html
- Mr. Uday Kotak Committee, Report of the committee on corporate governance, (Oct 5, 2017) https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html
- SEBI chairman’s speech at 14th CII Corporate Governance Summit, media/speeches, (April 06, 2021) https://www.sebi.gov.in/media/speeches/apr-2021/chairman-s-speech-dated-april-06-2021-at-14th-cii-corporate-governance-summit_49762.html
- SEBI (LODR) Regulations, 2015
- ANNEXTURE Clause 49- Corporate Governance- SEBI
- SEBI (Disclosure and Investor Protection Guidelines), 2009
- SEBI (Prohibition of Insider Trading) Regulations, 2015
- How Nirav Modi Cheated Punjab National Bank of Rs. 14000 Crore, India News (Nov 09, 2022, 11:31 pm IST) ndtv.com/india-news/how-nirav-modi-cheated-punjab-national-bank-of-rs-14-000-crore-3505954
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- Archita Tiwari, Case Study On: Subrata Roy Sahara vs. UOI and Ors., https://thelawbrigade.com/wp-content/uploads/2020/06/Archita-LPR.pdf
- DHFL-UBI fraud case: ED attaches assets worth Rs. 70.39 cr of Wadhawans, Article, (Oct. 27, 2023, 03:54 IST) https://indianexpress.com/article/cities/mumbai/dhfl-ubi-fraud-case-ed-attaches-assets-worth-rs-70-39-cr-of-wadhawans-9001209/
- What is IL&FS Crisis, Business Standard, https://www.business-standard.com/about/what-is-il-fs-crisis
- CG Power Reports massive fraud, https://www.thehindubusinessline.com/companies/cg-power-reports-huge-financial-fraud/article29184226.ece
RESEARCHED BY:
Shivani Prabhu
(1st year, LLM)