Author: Suma,Army Law College, Pune
Abstract
Corporate governance is a pillar towards a healthy market economy. Capital market regulator in India, Securities and Exchange Board of India (SEBI) has also been involved in institutionalization of good governance practices. The paper discusses critically how SEBI has influenced and enhanced the process of corporate governance in India by legislative changes, mode of enforcement and regulatory innovation. It also discusses the changes in the governance standards with the important reforms like the Clause 49; SEBI (LODR) Regulations and more recently brought about after the high-profile corporate collapses.
Introduction
Corporate governance refers to a set of guidelines, conventions, as well as procedures by which a firm is managed and directed. It encompasses transparency, and accountability, and just and equal treatment to shareholders. The corporate scandals like Satyam Computers (2009) and IL&FS (2018) and the recent Yes Bank (2020) have fueled the demand of good governance in India. Here, SEBI has become a major institution when it comes to implementing and developing the governance standards.
The SEBI is the regulatory authority that is established to regulate securities markets and to safeguard the interests of investors as provided in the SEBI Act, 1992. Examples of the steps to change Indian corporate practice and align it with other companies of the world, which have been organized over the decades with the involvement of SEBI, cannot be listed extenuatingly.
Evolution of corporate governance in India
Before the actions of SEBI, Corporate governance in India was almost in the hands of voluntary codes and Companies Act, 1956. Because it was not much enforced and the protection of minority shareholders was not given too much attention and they were not treated favorably. The first voluntary code of corporate governance in India came out in 1998 by Confederation of Indian Industry (CII). . Much later in the year 1999, SEBI formed Kumar Mangalam Birla Committee under which modus operandi of Clause 49 of listing agreement began. This was a land mark event because clause 49 had brought new standards of governance which would be made mandatory to listed firms.
SEBI’s Institutional Role
The SEBI draws its strength under the SEBI Act, 1992, the Companies Act, 2013 as well as the Securities Contracts (Regulation) Act, 1956. It has significant functions:
Control of stock exchange and capital markets; Protection of interest of investors; Formulation of regulations of listed companies; Taking action against the offenders
The SEBI LODR, 2015 (SEBI List Obligations and Disclosure Requirements) that replaced clause 49 is largely the instrument used by SEBI governance.
Major SEBI Initiatives in Corporate Governance
Clause 49 of the listing agreement: Clause 49 which came into effect in 2000 and was redrafted in 2004 required: The Composition of the Board Mandatory (at least 50 per cent non-executives), Independent directors, audit committees, CEO/CFO to certify financial statements. It aligned Indian approaches towards the Sarbanes-Oxley standards in the United States.
SEBI (LODR) Regulations, 2015: The LODR Regulations summed up the previous circulars and brought an entire pack of requirements to listed companies. Important requirements are: Disclosures of Information: the financial and governance related information, Role and composition of the Board committees, Timely disclosure of quarterly results, Duty of promoters, directors and KMPs. LODR consists of living regulation, which is often revised in accordance with the tendencies on the market.
Kotak Committee Report (2017): Having noticed the need to improve norms of governance; SEBI formed a committee on corporate governance chaired by Uday Kotak referred to as Kotak Committee on Corporate Governance. In 2018 SEBI modified the LODR Regulations based on its recommendations. Important transformations were: A minimum of 6 directors in the board, Forced division of the position of CEO and Chairman (which became voluntary), Improved audit and nomination committees duties, More detailed enhancement of related-party transactions. These reforms focused on board accountability, independence and transparency.
Board Composition and Independence
SEBI also requires a balanced composition of board to ensure clear avoidance of power concentration :A minimum of 1 female director in the board; At least 50 per cent independent directors where Chairperson is not a non-executive; Nomination and Remuneration Committee so as to make appointments on merit basis; The regulation 17 of SEBI LODR requires the independent directors to be independent of all conflicts of interests and their appointment should be shareholder approved.
Disclosure and transparency norms
Corporate governance entails transparent disclosure. SEBI has made some commanding norms under:
Regulation 30- Disclosure of material events and price-sensitive information
Regulation 33 -Timely reporting of financial outcomes
Regulation 34- Disclosure requirements of annual report
There has also been the encouragement of using XBRL (extensible Business Reporting Language) to bring the digital accuracy.
Related party transactions:
The Indian caselaw has often suffered abuse with RPTs. The current requirement of SEBI:
RPT disclosure to stock markets
Material RPTs should be authorized by the shareholders
The scrutiny of independent board directors
In 2022, SEBI took another step and made RPT norms even stricter by increasing the list of related parties and transactions that should be approved.
SEBI and Shareholder Empowerment
SEBI has taken a number of actions in order to increase the role of retail investors in the financial markets by introducing an electronic voting process, enhanced proxy voting and Stewardship Codes on institutional investors. The purposes of these changes are to render the voting process more transparent, open, and willful of the intentions of shareholders. Moreover, to ensure awareness of the retail investors and to impart education to make informed investment SEBI has developed the Investor Protection and Education Fund, to educate the retail investors and make them aware through education. All these efforts show that SEBI is determined to enhance the power of individual shareholders and create a more open and responsible stock market that will listen to the voices of all the investors.
Corporate governance rating and ESG
SEBI has also come up with so many ways that enhance green governance among Indian companies and among those mechanisms includes the BRS which makes Business Responsibility and Sustainability Reporting compulsory among the top 1000 listed companies. This project makes businesses reveal their attempts in the spheres of social, environmental, and governance agendas to ensure improved accountability and transparency. In addition to this, SEBI also wants ESG disclosures to include more details of carbon, labor, ethics, and governance. The combination of financial information with non-financial (integrated reporting) assists corporations in highlighting how they have created value in the long-term by carrying out sustainability processes. These initiatives are in tandem with the international trend toward sustainability and transparency, which rank Indian businesses higher as far as foreign investors are concerned, in terms of governance and good conduct. The cult follows these practices and as such India is able to build its reputation as well as their economic growth in the global market.
Challenges and limitations
As SEBI tries its best to control and protect financial markets, it faces some challenges which hamper its smooth performance. Enforcement actions are stalled by lengthy legal proceedings and appeals and lawbreakers get to go scot-free. Surveillance by SEBI on the listed companies also excludes unlisted companies, and this allows the unregulated companies to take a loophole and overlook the expected norm by taking a blind chance. Certain firms are living by the rule in the paper, but not the reality and deceiving investors and authorities in the industry. Conflicting interests arise when the market intermediaries rely on self-regulation, which requires more intensive monitoring. The two-tier regulatory body in India sometimes brings confusion and red tapes given that SEBI and MCA are the duties of the same actions in the country. SEBI should promote enforcement and by simplifying the enforcement process, expanding its scope, regulating the intermediaries and removing the red tape between SEBI and MCA so as to enhance its efficiency. The succession of these challenges needs to be addressed in order to make SEBI a stronger and more active regulator that can assure market integrity and investor trusts.
Conclusion and Way Forward
In India, SEBI has been superb in improving corporate governance practices in the country, by creating clear guidelines on disclosure, board accountability and transactions with minority shareholders. Its adaptive regulatory regime is targeted at keeping up with the fluctuating market forces and investing trust in them by reinforcing the corporate behavior and ethical operations standards. In the future, SEBI should pay attention to improving enforcement capability, whistleblower protection, diversity, and ESG practices, and regulation gaps between MCA and SEBI. With international best practices shaping it and being agile in reacting to the domestic issues, SEBI can help make capital markets of India fair, transparent, and efficient to follows with its sustainable growth and economic stability. An effective system of governance eventually creates confidence and enhances the success of enterprises over a long period in India.
FAQs
What is SEBI’s role in promoting corporate governance in India?
Securities and Exchange Board of India (SEBI) takes a leading role in ensuring the endearment of transparency, accountability and fairness in the corporate operation. The SEBI, being the regulator of capital markets, frames these guidelines and regulations in order to guarantee that listed companies maintain high standards of corporate governance so that the interests of the investors and other stakeholders remain safe.
What key regulations has SEBI introduced to enhance corporate governance?
SEBI has introduced several pivotal regulations, including:
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)
Clause 49 of the Listing Agreement (now integrated into LODR)
Regulations on Related Party Transactions (RPTs)
Rules on Independent Directors’ appointments
Mandatory disclosures and board composition norms
These aim to strengthen oversight, promote ethical conduct, and improve financial transparency in listed companies.
