Wishlist On SEBI Regulations For Corporate Governance Framework 2.0

India has been on a constant path of improving its’ corporate governance standards for the last 30 years on the backdrop of various financial scams that took place one after the other - either in the stock market or in companies with fraudulent practices. 

India's corporate governance journey & approach so far

In 2004, India’s corporate governance regime witnessed a paradigm shift, when SEBI implemented the recommendations of Narayan Murthy Committee by significantly elevating the corporate governance requirements with respect to board, audit committee, shareholders’ disclosures, CEO/CFO certifications on internal controls and, other reporting requirements. However, in 2009, the Satyam Software scam highlighted a new set of gaps in the corporate governance framework, which compelled the Regulators to look at it afresh.  

India, thereafter, started a new journey of reforms with the introduction of new set of laws & regulations. The Country got its new Companies Act, 2013 with deep emphasis on corporate governance. In 2015, SEBI introduced the SEBI (Listing Obligation & Disclosure Requirements) with subsequent continuous amendments to address the new challenges. Adding to these, the Institute of Company Secretaries of India (ICSI) issued fresh Secretarial Standards on board & shareholders’ meetings in 2015. 

Our journey of reforms is continuing even today with the introduction of recent guidelines such as - evolving CSR rules, Business Responsibility & Sustainability Report (BRSR), amendments in CARO, Audit trail rules, CERT-In directions, etc. The Regulators have clearly demonstrated an agile approach in introducing new regulations with the rapidly changing industry environment, which is highly appreciable.

Corporate Governance Framework 2.0

Considering our approach, journey & experience so far, it is important to take a pause and reflect on few moot questions such as – a.) Is our current approach sufficient; b.) has this been able to contain corporate frauds; and c.) Is there any element missing in our current framework? 

Before dwelling onto these questions, it’s worth going back to the basics to revisit/understand the meaning of “Corporate Governance”. Mr. G.N. Bajpai, Former Chairman,the  Securities & Exchange Board of India, explained this term as - “Corporate Governance represents the moral framework, the ethical framework and the value framework under which an enterprise takes decisions”. 

The Narayana Murthy Committee while attempting to promulgate an effective approach for successful corporate governance stated that - “Corporate governance is beyond the realm of law. It stems from the culture and mindset of management and cannot be regulated by legislation alone. It is about openness, integrity and accountability. What legislation can and should do, is to lay down a common framework - the “form” to ensure standards. The ‘substance’ will ultimately determine the credibility and integrity of the process. The substance is linked to the mindset and ethical standards of management.”

Similar views were given by the other Committees constituted by the Government for strengthening our Corporate Governance framework.

These definitions & explanations clearly highlight that a good corporate governance framework is based on two critical pillars - first, a strong legal framework (Form) and second, a well imbibed moral, ethical & value framework (Culture / Substance). The wholistic effectiveness of a corporate governance framework can be ensured, if and only if, both the pillars are strengthened simultaneously. 

The recent corporate frauds (such as Kingfisher Airlines, Jet Airways, PNB - Nirav Modi & Mehul Choksi, ILFS, DHFL, Yes Bank, ICICI Videocon scam and many more) prominently indicate that something is still missing in our existing corporate governance framework, which (according to me) is due to lack of our focused effort in uplifting well imbibed moral, ethical & value standards, especially in promoter-driven management or company. This can just not be done by bringing legislations but would need a dynamic framework to bind promoters or their management with the expected levels of moral & ethical standards. BRSR disclosure requirements and, mechanism of ESG rating of different companies are few such initial steps towards this direction. India should clearly come-up with more stringent rating mechanisms to gauge the moral & ethical standards of listed entities as well as for large size private companies, keeping special emphasis on below – 

1. How independently a company’s Board is performing (especially in a promoter-driven company),
2. How adequate is the size & skill of company’s board,
3. How independent is the company’s board performance evaluation, 
4. How independent is the process of appointment of Independent Directors,
5. How independently the independent Directors perform/behave,
6. How fairly/ deeply the related party transactions evaluated,
7. How independently the Statutory & Internal Auditors work, 
8. How seriously the interest of minority shareholders/ other stakeholders protected, etc. 

There is a long list of similar such areas where the companies need to apply a higher degree of moral, ethical & value standards, which goes way beyond the requirements of the legislation.

Focus on promoter-driven companies' need of the hour

We, as a country, are progressing extremely well in implementing new regulations in the fast-changing industry environment. We, however, need to come-up with innovative ideas & initiatives for uplifting the moral, ethical & value standards of different companies/managements, especially those driven by promoters. Developing a transparent, uniform & open mechanism to rate the ethical standards of different companies on various critical aspects of governance, including those highlighted above, would certainly compel the companies to uplift themselves way beyond the regulatory needs. This would also help the critical stakeholders, such as the minority shareholders, Financial Institutions, Banks, etc., to take an informed decision while dealing with such companies.

(Personal views of the writer).