Monday, January 7, 2013

SEBI’s Proposal to Overhaul Corporate Governance Norms


SEBI has issued a consultative paper 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. 

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