SEBI Announces Corporate Governance Reforms

(The following post has been written by, and uploaded on behalf of, Professor Umakanth)

Over a year ago, SEBI had issued a
consultation paper that suggested several reforms to corporate governance norms
in India that are contained in clause 49 of the listing agreement. The primary
purpose of SEBI’s effort was to integrate the stipulations of clause 49 with
the then prevailing clauses of the Companies Bill, 2012. Since then, the
Companies Act has been enacted in 2013 and several of its provisions have
already been brought into effect.
Yesterday, SEBI announced
changes to the listing agreement to give effect to its approach adopted last
year of streamlining its corporate governance provisions with that of the
Companies Act, 2013. Among many changes introduced, the reforms focus on
strengthening board independence, regulating related party transactions with
greater stringency, mandating a whistleblower policy and enhancing disclosure
While these reforms were expected (given
the previous consultation paper as well as the provisions of the Companies Act,
2013), SEBI’s adoption of these measures signals an important step in the
progression of corporate governance norms in India. As we have been arguing,
given the concentration of shareholding in Indian companies, certain targeted
measures are required to deal with governance issues that are specific to such
companies. For example, the possibility of related party transactions (and
consequently phenomena of tunneling) are quite probable in case of concentrated
shareholding and where there are corporate group structures. However, the
governance norms thus far had paid short shrift to these concerns. The
Companies Act, 2013 as well as the new reforms of SEBI address these concerns
head-on and are likely to bring in greater level of transparency as well as the
desired level of regulation of such transactions.
Of course, SEBI’s present announcement
contains only a list of the key measures adopted. The details changes to the
listing agreement are awaited before the impact can be analysed in greater
Although this is a timely step, it remains
to be seen how the chronological progression between the SEBI amendments and
the effectiveness of the Companies Act, 2013 would work. SEBI’s efforts for the
last year have been targeted at streamlining its norms with the new company
law, which came into effect in August 2013. The fact that the Companies Act,
2013 was enacted with great alacrity, that the multitude of draft rules were
announced by the Ministry of Corporate Affairs soon thereafter and that about
98 sections of the Act were notified seemed to suggest that the new legislation
would be brought into force in its entirety within a short span of time. However,
since that flurry of activity, there appears to have been a quiet phase where
it is not entirely clear as to when the remaining provisions of the Act
(including many of those that largely relate to corporate governance and
shareholder enforcement matters) will come into force. Matters appears to have
been mired in litigation with a challenge
having been mounted as to the establishment of the National Company Law
Tribunal (NCLT), due to which there may be significant delays before it may see
the light of day.
In any event, the SEBI reforms to bring the
norms in line with the Companies Act, 2013 are scheduled to become effective on
October 1, 2014. At one level, it would be somewhat paradoxical if the SEBI
norms precede the effectiveness of the Companies Act with which they were
intended to be aligned, but on the other hand SEBI could very well proceed with
the more stringent norms, which will apply to public listed companies
irrespective of the effectiveness of the Companies Act.

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V. Niranjan

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