The principles and 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.
There are 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.
Despite the need 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.
As far as India is 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.