This article has been written by Ms. Komolika Srivastava, a final-year student of ILS Law College, Pune.

ABSTRACT

This article delves into the intricate relationship between corporate governance and adherence to SEBI regulations in the context of India’s financial landscape. It highlights the extensive scope and diverse objectives of these regulations, emphasizing that corporate governance is more than a legal requirement; it is a fundamental value supporting accountability, transparency, and ethical conduct within companies.

The research underscores SEBI’s consistent focus on key elements like board composition, transparency, ethical behavior, shareholder engagement, and accountability. These aspects collectively create an environment that fosters trust, safeguards investor interests, and upholds market integrity. The study concludes that the principles of corporate governance, working in harmony with SEBI’s regulatory framework, not only contribute to market stability but also elevate India’s corporate ecosystem on the global stage.

 

INTRODUCTION

Corporations gather capital from a broad investor base, both domestically and globally. Investing in a corporation signifies a fundamental trust in the competence of its management. When an investor invests in a corporation, they expect the board and management to serve as guardians, protecting the invested capital and generating returns that surpass the cost of capital. Investors count on management to consistently act in their best interests and adhere to robust corporate governance practices.

Corporate governance entails the recognition by management of the inherent rights of shareholders as the rightful owners of the corporation. It underscores the managerial role as trustees acting on behalf of shareholders. Corporate governance is grounded in a commitment to values, ethical business practices, and a clear distinction between personal and corporate finances in the company’s management.

LEGAL FOUNDATIONS OF CORPORATE GOVERNANCE IN INDIA

Within the Indian corporate landscape, the legal framework for corporate governance is deeply rooted in the Companies Act of 2013. This pivotal legislation delineates the rights, duties, and responsibilities of various stakeholders, offering a comprehensive structure to uphold the principled functioning of corporate entities. The Companies Act of 2013 plays a foundational role, establishing the parameters and norms for corporate governance in the Indian business sphere.

The Companies Act of 1956 establishes the fundamental framework for regulating all companies. To ensure checks and balances on the powers of the Board, specific provisions have been integrated into the Act, including:

 

• Loan Approvals: Approval from the Corporate Governance is necessary for loans extended to directors, their relatives, or associated entities (Section 295).
• Interested Contracts: Board resolution and entry in the register are required for contracts in which directors have an interest (Section 297).
• Director Participation: Directors with a vested interest are prohibited from participating or voting in relevant matters (Section 300).
• Appointment Approval: The appointment of directors or their relatives to offices or positions that yield profits necessitates approval from shareholders. Corporate Governance approval is required if the remuneration surpasses the prescribed limit (Section 314).
• Audit Committee: Public companies with a paid-up capital of Rs. 5 Crores are mandated to have an Audit Committee (Section 292A).
• Shareholder Appeal: Shareholders holding 10% can appeal to the Court in cases of oppression or mismanagement (Section 397/398).

EVOLUTION OF CORPORATE GOVERNANCE REGULATIONS IN INDIA UNDER SEBI’S OVERSIGHT

In the realm of corporate governance in India, the regulatory framework has evolved significantly under the watchful eye of the Securities and Exchange Board of India (SEBI). Initially empowered by the Companies Act of 1956 to oversee specific aspects like securities issuance and dividend payments, SEBI’s role expanded over time. Every listed company is obligated to comply with the listing agreement’s provisions under Section 21 of the Securities Contracts Regulations Act, 1956. Failure to do so may lead to delisting or monetary penalties as per Sections 22A and 23E, respectively. However, SEBI’s authority is complementary rather than exclusive, as emphasized in Section 32 of the SEBI Act, 1992. Despite having the power to set listing conditions, SEBI operates within the broader legal framework without derogating from existing laws.

In response to global corporate governance trends, SEBI took proactive measures. The Kumar Mangalam Birla Committee in 1999 recommended amendments to the listing agreement, resulting in the incorporation of Clause 49 on February 21, 2000. Subsequent corporate governance crises prompted further action. In 2003, SEBI constituted the Narayana Murthy Committee, whose recommendations led to a circular on August 26, 2003. This circular revised Clause 49 of the Listing Agreement, introducing enhanced standards effective from January 1, 2006. The revised clause applied to both entities seeking initial listing and existing listed entities meeting specific financial criteria. SEBI has played a pivotal role in the development and enforcement of corporate governance regulations in India, working collaboratively with committees and adapting regulations to align with global best practices.

THE FOUR PS OF CORPORATE GOVERNANCE

Corporate governance, a complex concept, is often simplified into four core elements known as the Four Ps: People, Purpose, Process, and Performance. These guiding principles shed light on the essence and functioning of governance:

• People:

Central to the Four Ps is the emphasis on individuals, encompassing various aspects of the business equation such as founders, the board, stakeholders, consumers, and impartial observers. People serve as organizers who establish a purpose, create consistent processes, assess performance outcomes, and leverage these outcomes for personal and collective growth. The cyclical nature underscores the foundational role of individuals in corporate governance.

• Purpose:

Following the focus on people, Purpose encompasses the guiding principles driving an organization. This includes the mission statement and overarching objectives. All governance components, from policies to projects, are directed towards advancing this purpose. Even seemingly minor tasks, like documenting meeting minutes, contribute to the overall effectiveness of the business in achieving its intended purpose.

• Process:

Governance is fundamentally the process through which people collectively work towards the company’s purpose. This process is continuously refined through performance analysis to ensure consistent alignment with the intended purpose. Regular scrutiny of governance processes is essential to identify opportunities for streamlining and improving efficiency. Developing effective processes demands effort, but the benefits become evident in facilitating company growth.

• Performance:

Performance analysis emerges as a crucial skill within the governance framework. Evaluating the results of processes to determine their success and applying these insights to the entire organization is a primary function of corporate governance. The ability to assess whether a process was successful, or sufficiently successful, and then incorporating those findings into the organizational framework is integral to the governance process.

 

SEBI GUIDELINES ON CORPORATE GOVERNANCE

In a concerted effort to strengthen corporate governance, the Securities and Exchange Board of India (SEBI) has introduced several initiatives, established committees, and amended Clauses 35B and 49 of the listing agreement since its inception in 1992. These clauses serve as clear illustrations of SEBI’s active involvement in shaping corporate governance through established norms and regulations.SEBI has taken proactive measures to align Indian corporate governance practices with international standards. Recent amendments to Clauses 35B and 49 of the Listing Agreement signify an enhancement in governance, prioritizing the protection of the interests of all stakeholders.

SEBI’s standards and recommendations under Clauses 35B and 49 of the listing agreement for effective corporate governance are as follows:

 

Clause 35B:

The updated Clause 35B mandates that companies must facilitate electronic voting options for shareholders participating in resolutions during general meetings or through postal ballots. The company is required to dispatch meeting notices, including directors and the company’s auditors, via registered mail, courier, and publication on the official website. These notices must explicitly inform shareholders about the availability of postal and electronic ballots, with the company providing the internet link for e-voting.

 

Clause 49:

The revised Clause 49 of the Listing Agreement aligns with the 2013 Companies Act and integrates provisions for corporate governance compliance into 11 subclasses. Key aspects include:

 

1. Corporate Governance:

This subclass centers on safeguarding shareholders’ interests, including minority and foreign shareholders. It underscores the importance of transparent disclosure by outlining shareholders’ rights, the role of stakeholders in corporate governance, disclosure, transparency, and the responsibilities of the Board.

 

1. Board of Directors:

This sub-clause addresses director composition, tenure, restrictions on independent directors, the code of conduct, and the whistleblower policy. Essential provisions include:

• Composition of Directors: Ensuring an optimal balance of executive and non-executive directors, with specific requirements for women representation and a significant proportion of non-executive directors.
• Independent Directors: Establishing criteria for independent directors, including limitations on serving in multiple companies and terms of service.
• Code of Conduct: Requiring the publication of the Board’s code of conduct for every member and senior management on the company’s official website, incorporating the 2013 Companies Act’s stipulations for independent directors.
• Whistleblower Policy: Providing protection for individuals disclosing wrongdoing within the corporation, with a mandate for the company to disclose details of this mechanism on its website and during board meetings.

 

III. Audit Committee:

This specific sub-clause introduces the following aspects related to the Audit Committee:

• Qualification and Independent Audit Committee: The committee must consist of three directors as members, with 2/3rd of them being independent directors. One member should possess expertise in accounting and financial management.
• Meeting of Audit Committee: A minimum of four sessions should occur each year, with no more than a four-month gap between them.
• Powers of Audit Committee: The committee is empowered to investigate behavior falling within its scope, inquire with employees, seek independent legal or expert advice, and ensure the presence of skilled outsiders if deemed necessary.
• Role of Audit Committee: The committee is tasked with recommending criteria for auditors, reviewing financial statements, overseeing financial reports, and analyzing financial controls and risk management systems.
• Review of Information by Audit Committee: Mandatory reviews include discussions and analyses by management on financial situations, declarations of major related party transactions, identification of internal control flaws in management letters, and assessing the Chief Internal Auditor’s appointment, removal, and compensation arrangements.

 

1. Nomination and Remuneration Committee:

This committee, comprising a minimum of three non-executive directors with at least half being independent directors, holds responsibility for setting standards for assessing independent directors and the board. It also determines compensation for directors and other personnel while identifying candidates for directorships. The chairman of this committee addresses shareholder queries.

 

1. Subsidiary Companies:

For significant non-listed Indian subsidiary companies, a minimum of one independent director is required on its board, including at least one on the holding company’s board. The Audit Committee of the listed parent company scrutinizes the financial statements, particularly the investments made by the unlisted subsidiary firm.

 

1. Risk Management:

A company is mandated to establish a risk management committee responsible for informing the Board about risk management procedures and implementing and monitoring the risk management plan.

 

VII. Related Party Transactions:

This sub-clause defines related party transactions and necessitates prior approval from the Audit Committee for such transactions. Shareholder approval through special resolution is required for all material related party transactions.

 

VIII. Disclosures:

Disclosure requirements encompass details of all material related party transactions, accounting treatment, remuneration and resignation of directors, essential shareholder information, and specifics for the annual report.

 

1. Certification from Chief Executive Officer and Chief Finance Officer:

The CEO and CFO must provide a declaration to the board, asserting the accuracy of financial statements, the absence of fraudulent or illegal transactions, and notable changes made to auditors and the Audit Committee.

 

1. Report on Corporate Governance:

Annual reports must include a distinct section on Corporate Governance, providing a detailed compliance report. Additionally, a quarterly compliance report must be submitted to the stock exchange 15 days before the quarter’s close, signed by the CEO or Compliance Officer.

 

1. Compliance:

For compliance with Corporate Governance conditions, the company must obtain a certificate from auditors or practicing company secretaries, which is to be submitted to stock exchanges alongside the annual report.

 

CHALLENGES AND FUTURE TRENDS IN CORPORATE GOVERNANCE

Adapting to Regulatory Changes: It is essential for companies to stay updated on modifications and additions to corporate laws to ensure compliance and uphold governance standards.

Technology and Cybersecurity: As businesses increasingly rely on technology, safeguarding corporate information through robust cybersecurity measures becomes crucial. This is vital for maintaining the trust of stakeholders.

Corporate governance functions as a set of guidelines and practices that a company follows to ensure fair and responsible conduct. It aims to treat everyone involved, including owners, employees, customers, and the community, fairly and make decisions transparently. However, maintaining fairness and responsibility faces challenges such as:

1. Differing rules for companies operating in various countries.
2. Emerging technology raising concerns about information security and ethical use.
3. Oversight difficulties in large, multifaceted corporations.
4. Ownership stakeholders seeking greater influence in decision-making.
5. Ethical dilemmas arising amid intense competition.

Looking ahead, significant changes in how companies approach corporate governance are anticipated:

1. Stricter regulations may be imposed to enforce fair and responsible business practices.
2. Companies are expected to prioritize initiatives beneficial to the environment and society, not solely focused on profit.
3. Adoption of advanced technologies like AI and big data for monitoring and adherence to governance rules may become more prevalent in business operations.

 

CONCLUSION

In conclusion, the intricate interplay between corporate governance and adherence to SEBI regulations forms a foundational element in India’s financial framework. This study has explored the extensive scope and diverse objectives embedded in these regulations. It is evident from the guidelines provided by SEBI that corporate governance is not merely a legal obligation but a fundamental value fostering accountability, transparency, and ethical behavior within a company.

SEBI’s consistent focus on elements like board composition, transparency, ethical conduct, shareholder engagement, and accountability creates an environment where trust, investor interests, and market integrity are carefully preserved. These principles, working in tandem with SEBI’s regulatory framework, not only fortify market stability but also propel India’s corporate landscape forward on the global stage.

 

REFERENCES:

• • This article was originally written by Process PA Team. The link for the same is herein  https://processpa.com/ExecutiveMatters/the-four-ps-of-corporate-governance
  • This article was originally written by SEBI- CONSULTATIVE PAPER ON REVIEW OF CORPORATE GOVERNANCE NORMS IN INDIA. The link for the same is herein  https://www.sebi.gov.in/sebi_data/attachdocs/1357290354602.pdf
  • This article was originally written by Yashika Nayak Student, LL.M 2nd Yr Prestige Institute of Management and Law, Gwalior, India.  The link for the same is herein  https://ijarsct.co.in/Paper15309.pdf
  • This article was originally written by Miti Jain. The link for the same is herein   https://ijcrt.org/papers/IJCRT2401207.pdf
  • This article was originally written by Sumedh Anil Dange. The link for the same is herein https://www.iimcal.ac.in/FinLab/email-template8/pdf/Sumedh-A-Dange.pdf
  • This article was originally written by Guhan Subramanian. The link for the same is herein https://hbr.org/2015/03/corporate-governance-2-0

• This article was originally written by Business Roundtable, The link for the same is herein https://corpgov.law.harvard.edu/2016/09/08/principles-of-corporate-governance/