SEBI Announces the Specifics of Revised Corporate Governance Norms

It was nearly a decade ago in
October 2004 that the Securities and Exchange Board of India (SEBI) announced
substantial revisions to the corporate governance norms contained in clause 49
of the listing agreement that applies to all public companies listed on an
Indian stock exchange. The revisions, however, took effect only from January 1,
2006. Since then, there have been some specific amendments to the norms but
very little substantial change so as to alter the philosophy of governance
mechanisms in India.
While the 2004 reforms to corporate
governance were markedly stringent compared to the previous position, those
norms operated under significant constraints. One of the criticisms of that
approach that some of us had raised (e.g. in this paper)
was that the corporate governance norms in India were largely adopted from the
Western markets such as the US and the UK, and that those norms were inadequate
to deal with the specific governance problems in Indian companies where
shareholding was concentrated among the controlling shareholders (or
promoters). The Indian situation necessitated a mechanism that provided greater
protection to minority shareholders in public listed companies. Although
initially there did not seem to be sufficient momentum to bring about radical
changes to corporate governance mechanisms in India, the intervening governance
scandals such as Satyam provided the necessary impetus for a paradigm shift.
This was aided by the enactment of the Companies Act, 2013 that introduced sea
change in governance norms.
It is in this context that SEBI
yesterday announced new
corporate governance norms
through a replacement of clause 49 of the
listing agreement that will become effective from October 1, 2014. These
revisions bring the SEBI norms in line with the requirements of the Companies
Act, 2013.
The new clause 49 represents an
important milestone in the evolution of corporate governance norms in India. It
essentially (perhaps for the first time) confronts the type of governance
problems that are prominent in India, i.e. where minority shareholders require
protection in the backdrop of the dominance of promoters in companies. Several
examples abound in the new clause 49: (i) express recognition of the role and
protection of minority shareholders; (ii) greater participation of shareholding
in the process of corporate democracy; (iii) stringent regulation of related
party transactions, including by requiring a “majority of the minority” voting
Finally, one might even say that
SEBI’s corporate governance norms have truly become “Indianized”, thereby
offering the potential for more effectively enhancing governance norms and
practices with the result that the Indian markets would be in a position to
command a better governance premium and enable more efficient capital raising
by Indian companies. If successful, the new corporate governance package introduced in India might very well be the harbinger of governance reforms in several Asian economies that suffer from the same corporate governance problems as India due to concentration of shareholding. 
Of course, at this stage, it is
only possible to glean the broad approach and philosophy of the new corporate
governance norms. They mandate a closer analysis of the specifics, which will
follow in due course. More importantly, however, substantive regulation is only
as good as the effectiveness of its enforcement (or lack thereof). It is likely
that the more reputable companies do not require regulation to follow enhanced
governance practice – they might commit themselves to higher standards
nevertheless. The true test will lie in the ability of the regulation and its
enforcement to ensure compliance (both in letter and spirit) by the entire
cross-section of listed companies. This, only time will tell.

The implementation of the provisions of the
Companies Act, 2013 and the new clause 49 (commencing October 1, 2014) over an
initial period of time will certainly provide an important framework for
empirical studies (both qualitative and quantitative) to be conducted in
determining the effectiveness of these revised norms as well as their

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.

1 comment

  • The Satyam saga portrayed the genuine predicament of independent directors with impeccable credentials. An impertinent reference would be to the grand old men in the great Indian epic. The moot question is how sensible is burdening eminent men with onerous responsibility who otherwise deserve a sinecure ? Is it right to infer that fresh thinking, presence of mind to spot the elephant in the room, guts to lock gaze with the new corporate reality, audacity to call the spade a spade and above all simple effective ideas continue to elude the lawmakers ?

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