norms of corporate governance tend to operate through layers. On the one hand,
there is the basic legislation, i.e. the Companies Act, SEBI Act and the like.
Then there are specific norms in the form of clause 49 of the listing agreement
that are mandatory for listed companies. Finally, there could be voluntary
guidelines that exhort companies towards higher standards. That leads to the
obvious question of how one can ensure compliance with these rules and norms.
essentially two forms of enforcement, viz. public and private. Public
enforcement is pursued by the state or the regulator against errant parties.
Such action may either be initiated suo
moto or based on a complaint or request received by it. Public enforcement
is usually targeted at the errant party, and to ensure deterrence. Private
enforcement, on the other hand, is initiated by an affected party before a
civil court or other appropriate forum. Such an action is also pursued by such
private party at its own cost. Private enforcement focuses on the affected
party, and largely operates to restitute or recompense the victim. While public
and private enforcement are both necessary, they perform somewhat different
roles. In that sense, an appropriate mix of the two methods may be necessary in
an ideal securities market.
for both methods, private enforcement is popular in certain jurisdictions such
as the US where class action suits have performed a significant role in
investor protection. In other jurisdictions, public enforcement tends to play a
larger role. In this context, a recent OECD report titled “Public
Enforcement and Corporate Governance in Asia: Guidance and Good Practices”
is useful in as much as it surveys the role of public enforcement in various
Asian countries in the context of compliance with corporate governance.
concerned, it is clear that public enforcement has played a more significant
role in the development of capital markets than private enforcement, as I have
observed in a recent paper
as well. SEBI’s emergence as a strong securities regulator over the last two
decades coupled with the difficulties in bringing (and taking to fruition)
securities actions before Indian courts seem to be the reason behind this
phenomenon. Nevertheless, given the added remedies provided to investors in the
form of the class action mechanism under the Companies Act, 2013 (section 245),
some change may be visible. However, it is unlikely to alter the balance given
the pendency before the Indian courts, inordinate delays and exorbitant costs
of bringing private securities claims. At the same time, the focus on public
enforcement is set to continue as SEBI’s hands have been further strengthened
through the Securities Laws (Amendment) Act, 2014.