SEBI’s Proposal to Overhaul Corporate Governance Norms

SEBI has issued
a consultative
that reviews corporate governance norms in India with a view to
overhauling them considering developments in the Indian corporate sector over
the last few years. The paper is quite detailed and is expected to generate a
great amount of discussion, which would be considered by is SEBI before
implementing any revised norms. Suggestions are due on the consultative paper
by January 31, 2013.  The purpose of this
post is not to consider the detailed recommendations in-depth, but to simply
provide some broad observations that would set out the context for a more
detailed analysis.
Clause 49 of the
listing agreement has been the mainstay of corporate governance in India for
more than a decade. Although such norms are expected to be dynamic in nature
and consistent with the ever-changing corporate scenario, clause 49 was
previously subject to detailed review way back in 2004, even though the revised
norms came into effect only in January 2006. Since then, despite significant
developments such as the Satyam corporate governance scandal, there was no
review of clause 49, and no concentrated efforts were undertaken by SEBI.
However, most of the changes or proposals came from the Central Government.
Notable among them are the Ministry of Corporate Affairs’ voluntary guidelines
of 2009, and substantial insertions on corporate governance issues in the Companies
Bill, 2011
, which has been approved by the Lok Sabha and is awaiting
consideration by the Rajya Sabha. There has been a fear that such a
multiplicity in the regulatory process would cause considerable inconsistency
between the various regulations regarding corporate governance that have been
issued by different regulators.
Given this
background, SEBI’s proposals seek to achieve two broad objectives: (i) to bring
the provisions of clause 49 on par with the proposals made in the Companies
Bill, 2011; and (ii) to make additional recommendations that impose a more
stringent regime for listed companies.
On the first count, the consultative paper sets out a detailed comparative analysis of
clause 49 and the Companies Bill, 2011, and makes proposals for ensuring parity
in the two regimes. It also contains a detailed comparative table, which
provides a useful tool to understand the various corporate governance norms in
India. Of course, on certain matters the proposed changes go beyond the
Companies Bill in the case of listed companies, which is understandable given
the large shareholder population in such companies. The proposals, however,
proceed on the assumption that the Companies Bill will become operational soon.
In case there is any delay on the passage of the Bill, it is necessary to
ensure that SEBI’s proposals will be given effect to nevertheless.
On the second count, the consultative paper makes some additional recommendations, which
are welcome. As some of us have argued in the past, the current governance
norms in India have been borrowed from Western jurisdictions where the
corporate structure consists of diffused shareholders with no concentration of
shareholding. However, the corporate structure that is predominant in India
consists of controlling shareholders. 
Given the mismatch of corporate structures, it was argued that the
current governance norms do little to protect the interests of the minority
shareholders. This critique has been given the required attention in the
current round of reforms, with proposals specifically being made to address the
corporate structure that is replete in Indian companies. Examples of these
proposals include minority shareholder participation in the election of
independent directors, detailed treatment of related party transactions, and
the like. The proposals on this account are fairly radical, and it remains to
be seen how much of it will actually be accepted given that there is likely to
be tremendous resistance to greater power to minority shareholders to the
diminution of power of the controlling shareholders. The novelty of these
proposals lies in the fact that this issue has now emerged to the forefront for
discussion and deliberation.

There is certainly a lot in
the consultative paper, and if accepted, many of these proposals could result
in significant change in the manner in which companies are governed. At the
same time, it is important to note that such norms would become effective only
if they are properly implemented and enforced by the regulatory authorities. 

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.

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