Enforcement of Corporate Governance Norms: Anecdotal Evidence

A constant quibble with corporate governance in India is that while the body of substantive norms has been ballooning over time, the enforcement of those norms has not kept pace. In a somewhat unusual measure, the National Stock Exchange (NSE) has threatened to suspend trading of a listed company for failure to file governance reports as required under the listing agreement. As the Business Standard notes:
There are some 1,300 listed companies on exchanges, according to information available on the public domain, that have not complied with the listing agreement or on corporate governance issues and they have been suspended.
It may be noted Clause 49 of the listing agreement, which is an umbrella regulation on corporate governance norms, mandates companies to submit a quarterly report, signed either by the compliance officer or the CEO, to the stock exchange within 15 days from the close of a quarter.
According to the Exchange public announcement, the company failed to respond to its notice for non-compliance with provisions of listing agreement.
While such ultimatums may exert pressure on companies to comply with corporate governance norms, it is the public shareholders who are likely to suffer if the stock exchange indeed carries them out. Any suspension of trading or delisting will cause equal harm to those shareholders as their holdings will instantly become illiquid.

Other measures targeted at the company have been made available in Section 23E of the Securities Contracts (Regulation) Act, 1956, which reads: “If a company … fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereof, it or he shall be liable to a penalty not exceeding twenty-five crore rupees.” Perhaps the use of such targeted enforcement measures may like generate greater compliance without directly affecting the interests of the public shareholders. It is not clear if enforcement pertaining to violation of corporate governance norms has been initiated yet against any company under Section 23E.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • But even if one were to consider the Section 23 E sanction in lieu of the suspension of trading sanction, Section 23 E speaks of the levy on the "company….".

    This induces moral hazard in agent-behavior; because the compliance of norms will have to be done by the agents acting on behalf of the company. And the sanction does not implicate the agent (but penalizes only the principal– the company (and therefore the shareholders), 23E has, potentially, similar effect to suspension of trading in that it (derivatively) penalizes the public shareholders.

    This penalty in lieu of a option to exit can perhaps be preferable in the theoretical scenario where the levy of penalty induces the exit but it is unlikely that the public shareholders will exercise the option of exit and lose out on otherwise sound investment merely because the penalty is levied; and practically, it seems difficult that the penalty will be the maximum leviable under section 23E.

    Of course that is not to say, I support the status quo penalty of suspension– my point is that it might be better to make the compliance officer(s) personally responsible so that they retain enough skin in the game. Although, the shareholders can "claw back" the levy from the culprit-officers in the model that is proposed, given the collective action problems inter se between the shareholders, I think shareholder initiative in this regard is considerably disincentivized.

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