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 process.
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 implementation.