Role of Regulators in achieving Corporate

Integrity
Rajnish Jindal
Asst. Professor
Symbiosis Law School, NOIDA
 INTRODUCTION
During the last three decades since the economic liberalization was initiated in India
there has been a significant increase in the corporate form of business
establishments. The removal of several licensing hurdles, the financial market reforms
especially capital market reforms, the introduction of modern technology based
trading, the strengthening the regulatory system of the capital market has increased
the confidence of the retail investors and foreign and domestic institutional investors
and they are not hesitating to invest their savings in the Indian capital market.
The primary market and the secondary market reforms have improved the
profitability, the liquidity and the transparency in the capital market investment and
reduced risk in it. The investors’ confidence has also improved in the capital market
investment. At the same time corporate misconduct and frauds have also increased
as seen in the developed countries. Capital market frauds like Harshad Mehta case,
corporate frauds like ‘The Satyam Computers’ case, the Sahara case, the Kingfisher
case have affected the confidence of the investors.
 INTRODUCTION
To overcome this and to regain investor confidence in capital market, several
legal and regulatory measures have been initiated by the government during the
last two decades. These include formal and informal measures that are
established among private actors as well as the by state or the public
enterprises. Some of the key legal and regulatory measures are as follows.
1. The Indian Company Act 2013
2. The Security Contracts (Regulation) Act 1956
3. The Securities and Exchange Board of India Act 1992
4. The Listing agreement to the Indian Stock Exchange 31 December 2015
5. The National Depositaries Act 1996
6. The Chartered Accountants Act 1949
7. The Company Secretaries Act 1980
8. Financial and Accounting Standards
 The Indian Companies Act, 2013
Corporate Governance under the new Companies Act 2013 has broadened its
meaning and scope. It includes among other things a complete module for fixing
the liability on the corporate entity. It is prescriptive to the companies rather
than recommendatory in nature. The major provisions relating to corporate
governance introduced in the new Company Law can be broadly grouped in to
eight groups namely:
1. Increased reporting standards
2. Higher auditing accountability
3. Risk management
4. Emphasis on investor protection
5. Composition of director board members and their responsibilities
6. Board committees
7. Inclusive Corporate Social Responsibility and
8. Compulsory whistle-blower mechanism
 The Indian Companies Act, 2013
Corporate Governance under the new Companies Act 2013 has broadened its
meaning and scope. It includes among other things a complete module for fixing
the liability on the corporate entity. It is prescriptive to the companies rather
than recommendatory in nature. The major provisions relating to corporate
governance introduced in the new Company Law can be broadly grouped in to
eight groups namely:
1. Increased reporting standards
2. Higher auditing accountability
3. Risk management
4. Emphasis on investor protection
5. Composition of director board members and their responsibilities
6. Board committees
7. Inclusive Corporate Social Responsibility and
8. Compulsory whistle-blower mechanism
 Investor Protection Under the Companies Act 2013
Strong investor protection is associated with effective corporate governance.
When an investor places his hard earned money in the securities of a
corporation, he does so with certain expectations of its performance, the
corporate benefits that may accrue to him, and above all, the prospects of
income from, and the possibilities of capital growth of the securities he holds in
the firm. A mismatch occurs when the expectations of the investors and the
unexpected final outcome in terms of income and/or capital in a corporation
whose investment decisions, apart from carrying certain risks of their own, may
not match those of the investors.
The core substance of corporate governance lies in designing and putting in
place mechanisms such as disclosures, monitoring, oversight and corrective
systems so that we can align the objectives of the two sets of players (investors
and managers) as closely as possible and minimiseagency problems.
 Law Enforcement for Investor Protection
There are several agencies in India that are expected to protect investors. In fact, there
are so many with overlapping functions that they cause confusion to the investors as to
who they should go for redressal of their grievances. The stated primary objective of the
country’s sole capital market regulator, the Securities and Exchange Board of India,
popularly known as SEBI, is protection of investors’ interests. But, investor protection is a
multi-dimensional function, requiring checks at various levels, as shown below:
■ Company level: Disclosure and Corporate Governance norms.
■ Stock brokers level: Self-regulating organisation of brokers.
■ Stock exchanges: Every stock exchange has to have a grievance redressal mechanism in place as
well as an investor protection fund.
■ Regulatory agencies:
● Investors’ Grievances and Guidance Division of the SEBI
● The Department of Corporate Affairs
● The Department of Economic Affairs
● The Reserve Bank of India
● The Consumer Courts & Courts of Law
The National Company Law Tribunal (NCLT)
The establishment of NCLT is another landmark contribution of the companies
Act 2013. This is aimed at fast and efficient resolution of disputes relating to the
affairs of the companies with out going to court of law when is very time
consuming.
The formation of the NCLT and the NCLAT is a significant step towards attaining
fast and efficient resolution of disputes relating to affairs of the Indian
corporates. It is expected that once all relevant provisions under the Companies
Act and the Bankruptcy Code are made effective, these tribunals would provide
holistic solutions to issues being faced by companies, including those of winding
up, oppression/mismanagement and insolvency. Being the sole forum dealing
with company related disputes, these tribunals would also eliminate any scope
for overlapping or conflicting rulings and minimize delays in resolution of
disputes, thus, proving to be a boon for the litigants. Decisions of the NCLT may
be appealed to the National Company Law Appellate Tribunal.
 Securities and Exchange Board of India Act, 1992
Another major legislation relating to corporate governance in India is the Securities and
Exchange Board of India Act of 1992 under which SEBI, the regulatory body of the stock
markets in India was established. Till 1991 in India, the implementation of various
provisions of the Companies Act 1956 relating to capital issue were in the hands of the
Controller of Capital Issue, an office attached to The Ministry of Company Affairs. When
the government moved to economic liberalization path in 1991, it realized the need of
professionalizing the capital market operation and hence abolished the office of
controller of capital issue and established the SEBI in 1988. Initially, it was an advisory
body for advising the government on capital market issues and then made it a statutory
regulatory body with effect from 1 April 1992. The aim of the SEBI was to professionalize
the Indian capital market and win the confidence of the investors and ensure fairness to
all capital market operators. Since the formation, the SEBI has initiated several measures
to overcome the inherent weakness of Indian capital market. Now the SEBI is the official
agency implementing various provisions of the Companies Act relating to public issue of
shares and capital market operations in India and increase the corporate value creation
process by ensuring better corporate governance.
 SEBI’s Three Pillars of Corporate Governance Initiatives
SEBI’S efforts to ensure quality corporate governance is based on
three things namely (1) Self Discipline, (2) Market discipline and (3)
Regulatory discipline.
As the regulator of capital market in India, the SEBI has been
focusing on the following areas to improve the corporate
governance.
(a) Ensure timely disclosure of relevant information.
(b) Providing an efficient and effective market system.
(c) Demonstrating reliable and effective enforcement and
(d) Enabling the highest standard of governance.
 SEBI’s Three Pillars of Corporate Governance Initiatives
Specific measures taken by the SEBI in respect of corporate governance:
■ Strengthening of disclosure norms for Initial Public Offers following the recommendations of
the Committee set up by SEBI under the Chairmanship of Shri Y. H. Malegam.
■ Providing information in the directors’ reports for utilization of funds and variation between
projected and actual use of funds according to the requirements of the Companies Act; inclusion
of cash flow and funds flow statement in annual reports.
■ Declaration of quarterly results.
■ Mandatory appointment of compliance officer for monitoring the share transfer process and
ensuring compliance with various rules and regulations.
■ Timely disclosure of material and price sensitive information including details of all material
events having a bearing on the performance of the company.
■ Dispatch of one copy of complete balance sheet to every household and abridged balance sheet
to all shareholders.
■ Issue of guidelines for preferential allotment at market related prices and
■ Issue of regulations providing for a fair and transparent framework for takeovers and
substantial acquisitions.
Clause 49 of the Listing Agreements of Listed Companies
On 17th April 2014 SEBI amended Clause 49 of the Listing Agreement. This has
come into effect from 1st October 2014. All listed companies must agree to
comply with the provisions of the Listing Agreement.

To Whom Clause 49 is Applicable?

■ All listed entities having a paid up share capital of Rs. 3 crores and above or net
worth of Rs. 25 crores or more at any time in the history of the company.
■ For other listed entities which are not companies, but body corporate (Example:
private and public sector banks, financial institutions, insurance companies, etc.)
incorporated under other statutes, the revised Clause 49 will apply to the extent that it
does not violate their respective statutes and guidelines or directives issued by the
relevant regulatory authorities.
Clause 49 of the Listing Agreements of Listed Companies
On 17th April 2014 SEBI amended Clause 49 of the Listing Agreement. This has
come into effect from 1st October 2014. All listed companies must agree to
comply with the provisions of the Listing Agreement.

To Whom Clause 49 was Applicable?

■ All listed entities having a paid up share capital of Rs. 3 crores and above or net
worth of Rs. 25 crores or more at any time in the history of the company.
■ For other listed entities which are not companies, but body corporate (Example:
private and public sector banks, financial institutions, insurance companies, etc.)
incorporated under other statutes, the revised Clause 49 will apply to the extent that it
does not violate their respective statutes and guidelines or directives issued by the
relevant regulatory authorities.
 The LODR Regulations
The enactment of the 2013 Act brought about a shift from a voluntary approach
to an ultra-mandatory approach towards corporate governance, with detailed
governance norms being included in the primary legislation itself. Thereafter, the
Listing Agreement was replaced by the SEBI (Listing Obligation and Disclosure
Requirements) Regulations, 2015 (“LODR Regulations”), which dealt extensively
with governance matters, replacing the regime under Clause 49 thereof. Based
on core concepts of adequate, timely and accurate disclosures of material
information to all stakeholders, equitable treatment of all shareholders,
recognition of the role of all stakeholders in governance, effective board
supervision of the management, the LODR Regulations prescribed standards of
governance higher than that contained in the Companies Act, 2013, given that
the interests of small, retail shareholders required additional protection from
acts of the majority.
 The LODR Regulations
The enactment of the 2013 Act brought about a shift from a voluntary approach
to an ultra-mandatory approach towards corporate governance, with detailed
governance norms being included in the primary legislation itself. Thereafter, the
Listing Agreement was replaced by the SEBI (Listing Obligation and Disclosure
Requirements) Regulations, 2015 (“LODR Regulations”), which dealt extensively
with governance matters, replacing the regime under Clause 49 thereof. Based
on core concepts of adequate, timely and accurate disclosures of material
information to all stakeholders, equitable treatment of all shareholders,
recognition of the role of all stakeholders in governance, effective board
supervision of the management, the LODR Regulations prescribed standards of
governance higher than that contained in the Companies Act, 2013, given that
the interests of small, retail shareholders required additional protection from
acts of the majority.
 National Depositaries Act, 1996
While initiating several steps in reforming the Indian capital market, the SEBI has
identified that although India had a vibrant capital market which is more than a century
old, the floor based trading and the paper-based settlement of transactions caused
substantial problems such as a lack of transparency in trading, the lengthy settlement
procedure, bad delivery, high cost of delivery and delayed transfer of title. Solution to the
problem is the introduction of screen based trading in place of conventional floor based
trading and settlements and digitalization of corporate securities in India. For this
purpose, The Depositories Act 1996 was introduced in India which paved the way for
digitization of corporate securities and screen based trading. For this purpose two
national securities depositories namely the National Securities Depository Limited (NSDL)
in 1996 and the Central Securities Depository Limited (CSDL) in 1999 were established.
This facilitated the conversion of Indian capital market to international standards that
handle most of the securities held and settled in de-materialized form in the Indian capital
markets.
 What is a Depository?
Depository means a place where something is deposited for safe keeping. It is an
organization which holds securities of a shareholder in an electronic form and facilitates
the transfer of ownership of securities on the settlement date. The system is based on
the concept of paperless trading. It is similar to opening a bank account where the
depositor’s money is safely kept. This method does away with all the risks and hassles
normally associated with paperwork. Consequently, the cost of transacting in a
depository environment is considerably lower as compared to transacting in certificates.
The NSDL is promoted by Industrial Development Bank of India Limited (IDBI) - the
largest development bank of India, the Unit Trust of India (now, Administrator of the
Specified Undertaking of the Unit Trust of India) and the National Stock Exchange of India
Limited (NSE). Some of the prominent banks in the country that have taken a stake in the
NSDL are Axis Bank Limited, the State Bank of India, the Oriental Bank of Commerce,
Citibank, the Standard Chartered Bank, HDFC Bank Limited, Dena Bank, Canara Bank and
the Union Bank of India. The CSDL was started in 1999 by BSE, SBI Bank of India, Bank of
Baroda and HDFC bank. Stock Holding Corporation of India Limited started in 1988 by
IDBI, ICICI, UTI, LIC and GIC also carries out the depository functions in India.
 Benefits of Depositories System
The major benefits of the depository system are as follows:
■ Enables immediate allotment, transfer and settlement.
■ Eliminate all problems associated with paper security.
■ Problem of odd lot is eliminated.
■ Interest rate for loans against pledged demat security is less.
 Benefits of Depositories System
The major benefits of the depository system are as follows:
■ Enables immediate allotment, transfer and settlement.
■ Eliminate all problems associated with paper security.
■ Problem of odd lot is eliminated.
■ Interest rate for loans against pledged demat security is less.
 ICAI and Corporate Governance
Chartered Accountants as professionals act as catalysts in applying
good principles of corporate governance. Some of the key roles
that they can play include:
(a) Specialized guidance in designing code of corporate governance.
(b) Specialized guidance in designing risk management framework.
(c) Specialized guidance in designing internal control framework.
(d) Specialized guidance in designing whistleblower policy.
 ICSI and Corporate Governance
 Statutory Requirement: Pursuant to section 383A of the Companies Act, 1956,
companies with a paid-up share capital of Rs. 5 crore or more are legally obliged to
appoint a whole-time Company Secretary who must be a member of the Institute of
Company Secretaries of India. Every company having a paid-up share capital of ` 10 lakh
more but less than Rs. 5 crore is required to engage the services of a Secretary in
Whole-time Practice for issue of compliance certificate.
 Corporate Governance Research and Training - ICSI has set up the ICSI- Centre for
Corporate Governance Research and Training (CCGRT) with the objective of fostering
and nurturing research initiatives among members of the Company Secretaries
profession and other researchers.
 Focus on Corporate Governance in the Course Curriculum
 Secretarial Standards – As a pioneering initiative, ICSI issues Secretarial Standards to
integrate, harmonise and standardise the diverse secretarial practices prevalent in
the corporate sector. Two Secretarial Standards issued by ICSI.
 Investor Education and Awareness
 ICSI and Corporate Governance
 Statutory Requirement: Pursuant to section 383A of the Companies Act, 1956,
companies with a paid-up share capital of Rs. 5 crore or more are legally obliged to
appoint a whole-time Company Secretary who must be a member of the Institute of
Company Secretaries of India. Every company having a paid-up share capital of ` 10 lakh
more but less than Rs. 5 crore is required to engage the services of a Secretary in
Whole-time Practice for issue of compliance certificate.
 Corporate Governance Research and Training - ICSI has set up the ICSI- Centre for
Corporate Governance Research and Training (CCGRT) with the objective of fostering
and nurturing research initiatives among members of the Company Secretaries
profession and other researchers.
 Focus on Corporate Governance in the Course Curriculum
 Secretarial Standards – As a pioneering initiative, ICSI issues Secretarial Standards to
integrate, harmonise and standardise the diverse secretarial practices prevalent in
the corporate sector. Two Secretarial Standards issued by ICSI.
 Investor Education and Awareness
Thanks…..