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1 Role of regulators in maintaining standards of Corporate Governance DR. MITA MEHTA 1, Mr. Kiran Joshi 2 SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES (SIMS) SYMBIOSIS INTERNATIONAL UNIVERSITY (SIU), RANGE HILLS ROAD, KHADKI, PUNE , MAHARASHTRA STATE, INDIA Abstract This research paper analyzes the role played by Securities and Exchange Board of India (SEBI), the most important regulator of securities market and the Indian corporate world in improving the corporate governance standards of India. In the past, corporate governance was loosely defined with its terms found in Company Law, accounting standards and the internal controls within the company. However the need for adopting corporate governance standards and practices by Indian companies arose since 1990s with the growth in the corporate India. Since the late 1990s the concept of Corporate Governance as the policy, process, structure and information used for direction and controlling the management of an entity began to take shape with the establishment of Securities and Exchange Board of India (SEBI) in The research paper explains the concept of corporate governance, evolution of corporate governance over a period of time, literature review, comments on this review and conclusion. SEBI has undertaken lot of initiatives to improve the corporate governance mechanism in India. However, a lot of efforts need to be put in at individual company level to take standards of corporate governance at new highs. Keywords : Regulator, SEBI, Corporate Governance, Indian Corporate, Compliances Introduction The regulatory framework for corporate governance is majorly covered in Companies Act, 1956 and the guidelines/directives issued by SEBI. The Companies Act is administered by Ministry of Corporate Affairs (MCA) and its provisions are imposed by the Company Law Board. Further, corporate governance guidelines relevant to banking and insurance companies are issued by regulators, Reserve Bank of India and the Insurance Regulatory Development Authority respectively. Confederation of Indian Industries (CII) developed the corporate governance code for Indian companies and brought the issue of corporate governance to the forefront of Indian companies. CII introduced voluntary guidelines for corporate governance to be followed by companies. However to add statutory compliance value to corporate governance norms and to achieve more wide spread adoption SEBI undertook various initiatives, the major one being revision in Clause 49 of the listing agreement. In some cases SEBI s requirements were more stringent as compared to the provisions of Companies Act. Literature review also underlines the important role of SEBI in bringing overhaul to the entire system of corporate governance. Evolution of Corporate Governance 34

2 1992 Establishment of Securities and Exchange Board of India (SEBI) 1996 First initiative on corporate governance by CII (Confederation of Indian Industry) by introducing voluntary corporate governance code 1999 Recommendations of Kumar Mangalam Birla committee on board of directors, audit committee, remuneration committee, management, shareholdersetc Mandatory corporate governance code was introduced by SEBI through Clause 49 of the listing agreement 2002 Naresh Chandra committee laid down guidelines for defining relationship between auditors and clients Narayan Murthy committee set up by SEBI gave its recommendations on strengthening the responsibility of audit committee, quality of financial disclosure, proceeds from IPO (initial public offer) and many other important aspects Revision of Clause 49 of the listing agreement by SEBI with changes in the definition of independent directors, responsibilities of audit committee, related party transactions, adoption of formal code of conduct, requirement of CEO/CFO certification and improvement in financial disclosures. Non mandatory requirements of whistle blower policy and training of board members were also included SEBI amended listing agreement by adding provisions related to appointment of chief financial officer (CFO) by audit committee and other financial disclosures. Review of Literature (Bhardwaj & Rao, 2014), thisresearch paper studies the concept of corporate governance, its evolution, reforms made by regulator over a period of time and the extent to which corporate governance practiced in Indian companies.for this CNX Nifty 50 companies are studied as the indexincludes 22 sectors of the economy and thus gives a wide and diverse picture which will help to achieve the objective of the study.further the research paper also reviews many literature which focuses on corporate governance practices followed in listed companies. The research paper considers the companies annual reports for financial years & and the revised Clause 49 of the listing agreement of stock exchanges introduced by SEBI. The comparison is made between corporate governance practices disclosed in the annual reports with the revised Clause 49.The research paper finally provides a snapshot of the number of companies following various provisions of revised Clause 49 of the listing agreement. The important requirements of Clause 49 are 1) Board members (Composition, Independent Directors, Non Executive Directors remuneration, No. of board meetings in a year & attendance of directors, directors membership in committees, code of conduct) 2) Audit Committee (Composition, Chairman of Committee, Qualification of members, No. of meetings, Quorum and role of committee) 3) Subsidiary companies 4) Disclosures (Related party transaction, material transactions with related party, financial statements with management explanation, proceeds from public/right/preferential issues, criteria for directors remuneration) 5) Certification of cash flow and all financial statements by CEO or CFO 6) Compliance report 7) Corporate Governance report 8) Non mandatory requirements The research paper concludes that majority of companies follow the mandatory provisions of revised Clause 49 and few companies like Bajaj Auto, Infosys, and Dr. Reddys disclose extra information which is not mandated by the revised Clause

3 (KPMG, 2014), analyses various SEBI s amendments towards corporate governance norms. The most importantamendment is revision in the Clause 49 of the listing agreement. The research note studies two important factors namely, the difference between the newly revised norms and the present norms of Clause 49 and the comparison of SEBI Corporate Governance norms with Companies Act Major points of difference between revised norms and existing norms are as follows 1. Limit on the number of independent directorships 2. Independent directors are not entitled to hold any stock options in the company 3. The number of board meetings necessary in a year. 4. Role and duties of independent directors 5. Whistle Blower policy 6. Extension of scope and role of Audit Committee to include the review and check of independence of auditor, sanction of related party transactions, inspection of intercorporate loans and assessment of internal controls along with risk management systems. 7. Formation of Nominations and Remuneration Committee (NRC) as per the requirements under the Act. 8. Fixing the responsibility of the board for formulating, executing and checking risk management plan for the company. 9. Defining the related party transactions and approving them by Audit Committees and by shareholders through passing special resolution in the general meeting. 10. Disclosure requirements in the Annual Report of the company In majority areas Companies Act and Clause 49 requirements are in line. However they differ in some areas such as the term of independent directors, limit on number of independent directorships, sanction of related party transactions. SEBI s requirements are stricter in certain cases as compared to provisions of Companies Act. SEBI s strong intention is also clear from its move to set up a monitoring cell to assess company s compliance with Clause 49 provisions and report any non-complianceto SEBI within a period of 60 days from the end of every quarter. (Chakrabarti), in the research paper studies the evolution of corporate governance and various challenges faced in its implementation. The paper explains how the corporate governance gained momentum worldwide after collapse of high profile companies like Enron, WorldCom. It establishes a positive correlation between the effective corporate governance system and economic growth. Good corporate governance reduces cost of capital with lower risk and boosts real investments and return on capital/assets. Poor corporate governance affects growth of new companies and in turn affects economic development of the country. The research paper highlights crucialproblems in corporate governance such as dispersed ownership and limited liability leading to inefficient monitoring by management, relatively vulnerable equity market to manipulations, dominating family firms, agency system and elevated level of corruption. Effective corporate governance system is one tool to deal with safeguarding rights of minority shareholders, investors and creditors by aligning interest of the company management with that of the shareholders. Country s legal system plays a vital role for good corporate governance. Indian laws follow English common law system and thus provide very good protection to shareholders on paper. However their application and enforcement is a question mark. Proper enforcement of law is more important than the quality of law on paper.inefficient legal system in protecting shareholders rights leads to concentration of ownership and low level of external financing and this phenomenon is present in East Asian economies and in India as well. Before liberalization, rights of minority shareholders and creditors remained unprotected in India. Post liberalization, slowly and steadily lot of changes were introduced in both laws and regulations related to corporate governance and SEBI has played very important role in bringing overhaul to corporate governance system in India. Corporate Governance laws are one of the best in India. However the important challenge is the implementation of these rules and regulations at the ground level. With Chambers of commerce 36

4 and industry organizations placing more value on improvement in corporate governance system, its future seems better than the past. (Kaushik & Kamboj), have discussed in their research paper analyses the regulatory framework and SEBI s role in devising the mechanism for corporate governance.in order to determine the effectiveness of SEBI s role in the implementation of corporate governance norms, this research paper studies following: 1. Submissions by companies to National Stock Exchange regarding compliance with provisions of corporate governance for the quarter ended June However,it doesn t consider the quality of compliance and the benefit derived by companies from such compliance. 2. Analysis of effect of adoption of corporate governance mechanism on 100 companies of BSE 100 index for a period of 7 years from 2005 using statistical and financial evaluation tools 3. Determining the effectiveness of adjudication and appellate process by analyzing SAT orders passed for 100 appeals and corresponding orders passed by SEBI/Adjudicating officer 4. Ascertaining the effectiveness of consent orders After analyzing above data, it was found that 70% of companies complied with the provisions of corporate governance and that there is no correlation between the adherence to corporate governance norms and the corporate performance. The research paper also concludes that SEBI has indeed played a very important role in establishing good corporate governance system in the country though only for listed companies; there is still scope for improvement in overall implementation and transparency to boost greater confidence in capital markets. (Committee on Corporate Governance, 2003), is a committee on corporate governance was established by SEBI in order to review the present corporate governance norms and suggest further improvements to raise the standard of corporate governance in India. The committee comprised of experts from industry forums, industry captains, academicians, public accountants and financial press. The committee discussed various issues related with audit committee, independent directors, related party transactions, number of directorships, compensation, and code of conduct, risk management and financial disclosures. The final report of the committee includes some key recommendations such as improvement in the quality of financial disclosure, disclosure of business risk in the annual reports of companies, increasing the responsibilities of audit committees, disclosure of non-executive directors compensation and adoption of formal code of conduct. There were some nonmandatory recommendations like training of board members and their performance evaluation. The committee was of the belief that if these recommendations were implemented through the regulatory framework of SEBI, it will strengthen the existing corporate governance system. Companies following good corporate governance norms will fetch good valuations and will be able to raise capital easily from the market all over the world. The committee was also of the view that these recommendations should be applied not only to listed and actively traded companies but also to suspended and those registered with BIFR, subject to directions provided by BIFR in this regard. (Afsharipour, 2010), in the Director Note, provides overview of phase wise corporate governance reforms in India. Since 1990, significant efforts were undertaken by companies, regulators and industry experts to overhaul the corporate governance system in India. It also explains how Satyam scandal of 2009 made it necessary to accelerate the speed of improvement in corporate governance norms. The revised Clause 49 provisions of the listing agreement have been detailed out in the report. The report briefly mentions the voluntary guidelines of Ministry of Corporate Affairs. The report finally expresses concern about whether recent voluntary requirements of corporate governance will be made mandatory for all companies in future. 37

5 (Purohit), has discussed the history of corporate governance in India, recommendations by various committees formed for improvement in corporate governance norms, requirements of revised Clause 49 of the listing agreement and provisions of Companies Act The article concludes that the process of implementing corporate governance principles has been sluggish in India. It also points out that the corporate governance model of India is based on Anglo-Saxon governance model of UK though the corporate structure of two markets differs considerably. Hence the article questions the appropriateness in choosing the base for corporate governance. Comments The literature reviews in detail the concept of corporate governance, its need in today s competitive world, and the role of SEBI in ensuring the implementation of corporate governance norms. It has studied Nifty 50 companies as requirements of Clause 49 of the listing agreement are applicable to all listed companies and has also provided details about compliance by all listed companies during 2011 & Further the literature also compares the revised Clause 49 provisions of the listing agreement with that of the requirements mentioned in the Companies Act Finally it points out how companies will be benefited by implementation of corporate governance norms and the need for extension of scope of corporate governance. Conclusion Companies raise capital at both domestic and international level. Investors invest in the company with faith in the management and to earn a good rate of return on its investment. Investors expect management of the company to act on their behalf as trustees and safeguard their interest and capital at all times by adopting good corporate governance system. Thus corporate governance is about commitment to values and following ethical business practices. Companies will be able to access capital, retain best talent, and partner with vendors if they exhibit ethical behavior. Companies need to realize that the growth requires support and assistance of all stakeholders. The scope of corporate governance is not limited only to fulfilling the requirements of corporate law but it extends to achieving an objective of optimizing the shareholder value in the long term by ensuring company board s commitment in managing the company in transparent manner.board shall actually act in best interest of shareholders and pass on profits to actual owners of the company, i.e. shareholders. SEBI is putting lot of efforts to protect investors, reducing principal-agent problem (i.e. distinction of owners and controllers) through continuous review of corporate governance mechanism. However, it is a need of an hour to put lot of efforts at individual company level to take standards of corporate governance at new highs which will certainly benefit all stakeholders and country. References [1] Afsharipour, A. (2011, April). A brief overview of corporate governance reforms in India. In Conference Board Director Notes No. DN-020 [2] Bhardwaj, M. N., & Rao, C. D. B. R. (2014). Corporate governance practices in India a case study. Asia Pacific Journal of Research Vol: I Issue XIII. [3] Murthy, N., & Narayan, R. (2003). Report of the SEBI committee on corporate governance. [4] Neelam, M., Batani, C. D., & Rao, R. (2014). CORPORATE GOVERNANCE PRACTICES IN INDIA A CASE STUDY. management accountant, 94. [5] Rajesh, C. (2005). Corporate Governance in India: Evolution and Challenges.CFR working. Web Pages: 38

6 [1] KPMG (2014) SEBI s amendments to corporate governance norms Web. enorms.pdf [2] Purohit, D. (n.d.). CORPORATE GOVERNANCE IN INDIA: WITH REFERENCE TO ITS HISTORY AND LEGAL FRAMEWORK IN INDIA. Altius Shodh Journal of Management and Commerce(ISSN ). Web. 39