Friday, February 14, 2014

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 requirements.

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 detail.

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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