PROJECT WORK

ROLE OF SEBI IN ENHANCING CORPORATE GOVERNANCE

SUBMITTED TO: SUBMITTED BY:

Ms. Mukta Anikesh Rathi (17RU11002)

Assistant Professor Student

School of Law School of Law

Raffles University Raffles University

TABLE OF CONTENTS

1. Acknowledgment
2. Research Methodology
3. Introduction
4. Main Objectives of SEBI:
5. Corporate Governance
6. Corporate Governance: Conceptual Framework
7. Legal and Regulatory framework on corporate governance
8. Role of SEBI in promoting Corporate Governance
9. Securities and Exchange Board of India Act, 1992
10. Major steps to ensure effective corporate governance
11. Amendments in Clause 35B
12. Amendments in Clause 49
13. Conclusion
14. References
ACKNOWLEDGMENT

I take this opportunity to express our humble gratitude and personal regards to Ms. Mukta for
inspiring me and guiding us during the course of this assignment work and also for his
cooperation and guidance from time to time during the course of this assignment work on the
topic.
I have prepared this assignment not only for marks but also to increase my knowledge.

Place: Neemrana -Anikesh Rathi

RESEARCH METHODOLOGY

Aims and Objectives

The aim of the assignment is to present a detailed study of the topic “Role of SEBI in Enhancing
Corporate Governance”forming a concrete informative capsule of the same with an insight into
its relevance in the Competition Law.

Research Plan
The researchers have followed Doctrinal method

Method of Writing
The researcher has used both a descriptive and analytical method of writing in order to
understand the issues better. The researcher has also relied on case law, to get an in depth
understanding of the subject. The method of writing followed in the course of this research
project is primarily analytical.

Sources of Data
The researcher has used secondary sources in order to obtain sufficient data for this project,
namely,

 Online Research Portals

 Articles
Introduction
Securities and Exchange Board of India was formed after the Indian parliament passed
Securities and Exchange Board of India Act, 1992 in response to financial Services Assessment
program, a program developed by the World Bank and International Monetary Fund that
observes and reports on global financial systems. The Indian government wanted to establish
a strong financial atmosphere and securities market with a regulator promoting the latest in
corporate governance standards. SEBI sets standards in which the securities market must
operate, protecting the rights of issuers and investors. SEBI has power to investigate
circumstances where market or its players have been harmed and can enforce govern standards
with directives. An appeal process in place ensures accountability and transparency. SEBI may
terminate from the securities list any company that does not comply with its governance
standards and regulation. Main aim of its origin was to curb the malpractices such as Lack of
transparency in the trading operations and prices charged to clients, Poor services due to delay
in passing contract notes or not passing contract notes, Delay in making payments to clients or
in giving delivery of shares, Persistence of odd lots and refusal of companies to stop this
practice of allotting shares in odd lots, Insider trading by agents of companies or brokers rigging
and manipulating prices, unofficial premium on new issue, violation of rules and regulations
of stock exchange and listing requirements. Due to these malpractices the customers started
losing confidence and faith in stock exchange. Many high profile corporate governance failure
scams like the stock market scam, the UTI scam, Ketan Parikh scam, Satyam scam, which was
severely criticized by the shareholders, called for a need to make corporate governance in India
transparent as it greatly affects the development of the country. Effective corporate governance
is only key to regain the trust of investors and safeguard their interest.

Main Objectives of SEBI:

The SEBI has been entrusted with both the regulatory and developmental functions. The
objectives of SEBI are as follows:

a. Investor protection, to ensure steady flow of savings into the Capital Market.

b. Ensuring the fair practices by the issuers of securities, namely, companies so that they can
raise resources atleast cost.
c. Promotion of efficient services by brokers, merchant bankers and other intermediaries so that
they becomecompetitive and professional.
Corporate Governance
Corporate governance is the manner in which companies or market systems operate, including
the rules, regulations, policies and standards for accountability, transparency and general
corporate integrity. Corporate governance has also been more narrowly explained as a set of
law and sound approaches by which corporations are directed and controlled while focusing
on the internal and external corporate structures with the intention of monitoring the actions of
management and directors and thereby, mitigating agency risks which may stem from the
misdeeds of corporate officers.

Corporate Governance: Conceptual Framework

Corporate Governance has gained momentum across the world due to corporate failures,
unethical business practices and insufficient disclosure etc. Effective Corporate Governance
depends upon two factors. Transparency in the business operations and the second are the legal
and regulatory framework created by the
Government. There is a gap between percept and practice of Corporate Governance. The topic
of Corporate Governance has gained prominence since the 1980‘s and more so after the code
of corporate governance issued by the Cadbury committee. In line with the Cadbury committee,
the Kumara-mangalam Birla Committee has also issued a code of corporate governance for
companies in India. According to the Kumara mangalam Birla Committee, “Corporate
governance is the system by which companies are directed and controlled. Boards of directors
are responsible for the governance of their companies. The shareholders‘ role in governance
is to appoint the directors and the auditors and to satisfy themselves that an appropriate
governance structure is in place. The responsibilities of the board include setting the
company‘s strategic aims, providing the leadership to put them into effect, supervising the
management of the business and reporting to shareholders on their stewardship. The board‘s
actions are subject to laws, regulations and the shareholders in general meeting”. The
governance structure of a country protects the investors from expropriation by managers and
large shareholders. In different jurisdictions, rules protecting investors come from different
sources, including company, security, bankruptcy, takeover, and competition laws, and also
from stock exchange regulations and accounting standards (La Porta et al 2000).
Legal and Regulatory framework on corporate governance
The Indian statutory framework has, by and large, been in consonance with the international
best practices of corporate governance. Broadly speaking, the corporate governance
mechanism for companies in India is enumerated in the following enactments/ regulations/
guidelines/ listing agreement:

1. Companies Act, 1956 provides for basic framework for regulation of all the companies.
But it had some loopholes which could not control fraudulent practices and raised a question
mark on corporate governance practices of the concern. So, there are number of amendment
had proposed and implemented in the Act. But after the Satyam scam need realised toreframe
the Act, which resulted in Companies Act, 2013.

The Companies Act, 2013 inter alia contains provisions relating to board constitution, board
meetings, board processes, independent directors, general meetings, audit committees, related
party transactions, disclosure requirements in financial statements, etc.

2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory

authority having jurisdiction over listed companies and which issues regulations, rules and
guidelines to companies to ensure protection of investors.

3. Standard Listing Agreement of Stock Exchanges: For companies whose shares are
listed on the stock exchanges.

4. Accounting Standards issued by the Institute of Chartered Accountants of India

(ICAI): ICAI is an autonomous body, which issues accounting standards providing guidelines
for disclosures of financial information. Section 129 of the New Companies Act inter alia
provides that the financial statements shall give a true and fair view of the state of affairs of
the company or companies, comply with the accounting standards notified under s 133 of the
New Companies Act. It is further provided that items contained in such financial statements
shall be in accordance with the accounting standards.

5. Secretarial Standards issued by the Institute of Company Secretaries of India

(ICSI): ICSI is an autonomous body, which issues secretarial standards in terms of the
provisions of the New Companies Act. So far, the ICSI has issued Secretarial Standard on
"Meetings of the Board of Directors" (SS-1) and Secretarial Standards on "General Meetings"
(SS-2). These Secretarial Standards have come into force w.e.f. July 1, 2015. Section 118(10)
of the New Companies Act provide that every company (other than one person company) shall
observe Secretarial Standards specified as such by the ICSI with respect to general and board
meetings.

Role of SEBI in promoting Corporate Governance

The establishment of SEBI has also played a significant role in establishing norms for corporate
governance in India. Over the years, SEBI constituted two committees to make
recommendations relating to corporate governance in india, which were Kumar Manglam Birla
committee, which submitted its report in 2000 and the Narayana Murthy Committe, which
submitted its report in 2003. These committees made various important recommendations.
SEBI Major Recommendations were:

• Composition of Board

• Formation of Audit Committee

• Disclosure of relevant information to the shareholders

The recommendations of these committees form the foundation of the legal regime for
corporate governance in India. An improved corporate governance is the key objective of the
regulatory framework in the securities market. Accordingly, Securities and Exchange Board
of India (SEBI) has made several efforts with a view to evaluate the adequacy of existing
corporate governance practices in the country and further improve these practices. It is
implementing and maintaining the standards of corporate governance through the use of its
legal and regulatory framework, namely:Securities Contracts (Regulation) Act, 1956

This Act was enacted to prevent undesirable transactions and to check speculation in the
securities by regulating the business of dealing therein. Any stock exchange, which is desirous
of being recognised, may make an application in the prescribed manner to the Central
Government. Every application shall contain such particulars as may be prescribed, and shall
be accompanied by a copy of the bye-laws of the stock exchange for the regulation and control
of contracts as well as a copy of the rules relating in general to the constitution of the stock
exchange, and in particular to; firstly, the governing body of such stock exchange, its
constitution and powers of management and the manner in which its business is to be
transacted; secondly, the powers and duties of the office bearers of the stock exchange; thirdly,
the admission into the stock exchange of various classes of members, the qualifications for
membership, and the exclusion, suspension, expulsion and readmission of members there from
or there into; fourthly, the procedure for the registration of partnerships as members of the stock
exchange, in cases where the rules provide for such membership; and the nomination and
appointment of authorised representatives and clerks. Every recognised stock exchange shall
furnish the Central Government with a copy of the annual report, and such annual report shall
contain such particulars as may be prescribed. It may make rules or amend any rules made by
it to provide for all or any of the following matters, namely:- (i) the restriction of voting rights
to members only in respect of any matter placed before the stock exchange at any meeting; (ii)
the regulation of voting rights in respect of any matter placed before the stock exchange at any
meeting so that each member may be entitled to have one vote only, irrespective of his share
of the paid-up equity capital of the stock exchange; (iii) the restriction on the right of a member
to appoint another person as his proxy to attend and vote at a meeting of the stock exchange;
etc.
If, in the opinion of the Central Government, an emergency has arisen and for the purpose of
meeting the emergency, the Central Government considers it expedient so to do, it may, by
notification in the Official Gazette, for reasons to be set out therein, direct a recognised stock
exchange to suspend such of its business for such period not exceeding seven days and subject
to such conditions as may be specified in the notification, and, if, in the opinion of the Central
Government, the interest of the trade or the public interest requires that the period should be
extended, it may, by like notification extend the given period from time to time. Securities
Contracts (Regulation) Amendment Act, 2007 has been enacted in order to further amend the
Securities Contracts (Regulation) Act, 1956, with a view to include securitisation instruments
under the definition of 'securities' and provide for disclosure based regulation for issue of the
securitised instruments and the procedure thereof. This has been done keeping in view that
there is considerable potential in the securities market for the certificates or instruments under
securitisation transactions. Further, replication of the securities markets framework for these
instruments would facilitate trading on stock exchanges and, in turn, help development of the
market in terms of depth and liquidity.
Securities and Exchange Board of India Act, 1992
This Act was enacted to protect the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected therewith or
incidental thereto. For this purpose, the SEBI (the Board), by regulation, specify:- (i) the
matters relating to issue of capital, transfer of securities and other matters incidental thereto;
and (b) the manner in which such matters shall be disclosed by the companies. No stock-broker,
sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue,
merchant banker, underwriter, portfolio manager, investment adviser and such other
intermediary who may be associated with securities market shall buy, sell or deal in securities
except under, and in accordance with, the conditions of a certificate of registration obtained
from the Board in accordance with the regulations made under this Act.

No depository, participant, custodian of securities, foreign institutional investor, credit rating

agency, or any other intermediary associated with the securities market as the Board may by
notification in this behalf specify, shall buy or sell or deal in securities except under and in
accordance with the conditions of a certificate of registration obtained from the Board in
accordance with the regulations made under this Act. Further, no person shall sponsor or cause
to be sponsored or carry on or caused to be carried on any venture capital funds or collective
investment scheme including mutual funds, unless he obtains a certificate of registration from
the Board in accordance with the regulations.Every application for registration shall be in such
manner and on payment of such fees as may be determined by regulations. The Board may, by
order, suspend or cancel a certificate of registration in a prescribed manner, as may be
determined by regulations under this Act. However, no order shall be made unless the person
concerned has been given a reasonable opportunity of being heard. Depositories Act, 1996
This Act was enacted to provide for regulation of depositories in securities and for matters
connected therewith or incidental thereto. It provides for the introduction of scripless trading
system and settlement, which is considered necessary for the effective functioning of the
securities markets. As per the Act, the term 'depository' means "a company formed and
registered under the Companies Act, 1956 and which has been granted a certificate of
registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India
Act, 1992".No depository shall act as a depository unless it obtains a certificate of
commencement of business from the Board (the SEBI). The Board shall grant a certificate only
if it is satisfied that the depository has adequate systems and safeguards to prevent manipulation
of records and transactions. However, a certificate shall not be refused unless the depository
concerned has been given a reasonable opportunity of being heard.A depository shall enter into
an agreement with one or more participants as its agent, in such form as may be specified by
the bye-laws. Any person, through a participant, may enter into an agreement, in such form as
may be specified by the bye-laws, with any depository for availing its services. Any such
person shall surrender the certificate of security, for which he seeks to avail the services of a
depository, to the issuer in such manner as may be specified by the regulations. The issuer, on
receipt of certificate of security, shall cancel the certificate of security and substitute in its
records the name of the depository as a registered owner in respect of that security and inform
the depository accordingly. A depository shall, on receipt of information, enter the name of the
person referred in its records, as the beneficial owner.

On receipt of intimation from a participant, every depository shall register the transfer of
security in the name of the transferee. If a beneficial owner or a transferee of any security seeks
to have custody of such security, the depository shall inform the issuer accordingly. Every
person subscribing to securities offered by an issuer shall have the option either to receive the
security certificates or hold securities with a depository. Where a person opts to hold a security
with a depository, the issuer shall intimate such depository the details of allotment of the
security, and on receipt of such information the depository shall enter in its records the name
of the allottee as the beneficial owner of that security. A depository shall be deemed to be the
registered owner for the purposes of effecting transfer of ownership of security on behalf of a
beneficial owner. However, it shall not have any voting rights or any other rights in respect of
securities held by it. The beneficial owner shall be entitled to all the rights and benefits and be
subjected to all the liabilities in respect of his securities held by a depository. The Board, on
being satisfied that it is necessary in the public interest or in the interest of investors so to do,
may, by order in writing, (i) call upon any issuer, depository, participant or beneficial owner to
furnish in writing such information relating to the securities held in a depository as it may
require; or (ii) authorise any person to make an enquiry or inspection in relation to the affairs
of the issuer, beneficial owner, depository or participant, who shall submit a report of such
enquiry or inspection to it within such period as may be specified in the order.

Major steps to ensure effective corporate governance:

The Companies Act, 2013 was enacted on August 30, 2013 which provides for a major overhaul
in the Corporate Governance norms for all companies. The rules pertaining to Corporate
Governance were notified on March 27, 2014. SEBI decided to review the provisions of the
Listing Agreement in this regard with the objectives to align with the provisions of the
Companies Act, 2013, adopt best practices on corporate governance and to make the corporate
governance framework more effective. Hence, Clause 35B and Clause 49 of the Equity Listing
Agreement have been replaced by new listing agreement.This article highlights the major
changes :
Amendments in Clause 35B
This clause is applicable to all listed companies. As per revised clause the Company shall
provide e-voting facility to its shareholders, in respect of all shareholders’ resolutions, to
be passed at General Meetings or
through postal ballot.Such e-voting facility shall be kept open for such period specified under
the Companies (Management and Administration) ules, 2014 for shareholders to send their
assent or dissent.The Company shall continue to enable those shareholders, who do not have
access to e – voting facility, to send their assent or dissent in writing on a postal ballot.The
Company shall utilize the service of any one of the agencies providing e-voting platform, which
is in compliance with conditions specified by the MCA, Government of India, from time to
time.Issuer shall mention the Internet link of such e-voting platform in the notice to their
shareholders.

Amendments in Clause 49
The Clause 49 of the Listing Agreement shall be applicable to all companies whose equity
shares are listed on a recognized stock exchange from 1st October, 2014. The provisions
relating to constitution of a Risk Management Committee shall be applicable to top 100
listed companies by market capitalization as at the end of the immediate previous financial
year. The provisions with regards to the Related Party Transactions shall be applicable to all
prospective transactions. The main objectives of the amendment was to align the provision of
listing agreement with Companies Act, 2013. This is Clause 49(I) of the Listing Agreement. It
states the purpose for which the Clause 49 is instated. In case of any ambiguity, the provisions
of Clause 49 shall be interpreted and applied in alignment with these principles. Main
objectives of the clause are:

• The Rights of Shareholders

• Role of stakeholders in Corporate Governance

• Disclosure and transparency

• Responsibilities of the Board

• Board of Directors (“BOD” or “Board”)
The clause 49 is divided into different subsection and each subsection provide a different
guideline for effective governance; clause 49 (i) under this section SEBI defines the rights of
various stake holders and duty of corporate to protect shareholder’s interest. It also explains
the duties and responsibilities of board of
directors. This specifies that the disclosures must be made regarding proper compliance of
prescribed standards of accounting, financial and non- financial disclosure and be transparent
Board of Directors. clause 49 (ii) specifies the composition of board, inclusion of restrictions
on independent directors, the tenure of independent directors, corporate code of conduct and
whistle blowing policy. Clause 49 (iii) defines the constitution of audit committee. The audit
committee should have at least 3 members and out of which 2/3rd members be independent
directors. All the members must be financially literate and one member must be an expert in
accounting or related financial management. This committee has to sit at least 4 times in a year
with a gap of not more than four months in between two meetings. Through this amendment,
SEBI specifies the powers, role and responsibilities of audit committee members. Nomination
and Remuneration committee. Clause 49 (iv) explains the composition of remuneration
committee. This clause states the role of the Committee which includes formulation of criteria
to evaluate Independent directors, policy devising on Board diversity, identifying prospective
directors and senior management in accordance with the criteria laid down, recommendation
to the Board policies relating to remuneration of directors and other employees including key
managerial personnel. Clause 49 highlighted the responsibilities of listed and unlisted
subsidiaries of listed holding companies. Provisions as to unlisted subsidiary company: (a) at
least one independent director of the holding company should be director on the board of
Director of materially un-listed Indian subsidiary company, (b) the audit committee of the listed
holding has to review the financial statements materially unlisted Indian subsidiary company.
Clause 49 (vi) specifies that SEBI makes it an obligation of BOD of the top 100 companies by
market capitalization to constitute the risk management committee and has to determine its role
and functions and delegate powers as it may deem fit. Clause 49 (vii) explains that the
companies requires to place, all the information on the related party transactions in the ordinary
course of business, periodically in summary form, before the audit committee. Clause 49 (viii),
is related with disclosure norms. Companies has to quarterly report disclosing details on all
material facts related party transactions along with compliance report on Corporate Governance
be disclosed on its website and a web link stated in its annual reports. Apart from it,any change
in accounting treatment, information on the remuneration of Directors, directors’ relationship
with the company are be disclosed along with the annual report. Then material facts on
proceeds from public issue, rights issue, and preferential issues must be disclosed and
Certification from Chief Executive Officer (CEO) and Chief Finance Officer (CFO).Clause 49
(ix), made Board of Directors and Chief Executive Officer and Chief Finance Officer more
accountable and responsible. They must certify that they have reviewed the financial statements
and the cash flow statements to the best of their knowledge. Then they have to certify that the
Company hasn’t entered into any transaction which is a violation of Company’s
Code of Conduct, illegal or fraudulent to the best of their knowledge. Again it will be their duty
to inform the Auditors and Audit committee on any significant changes made in internal control
over financial reporting, changes in accounting policies, cases of significant fraud that they
have come across. Clause 49 (x) and (xi) specifies that corporate has to obtain the Compliance
Certificate on Corporate Governance from the Auditor of the Company or from a Practicing
Company Secretary. Such certificate shall become separate part of Annual Report. Certificate
is also to be submitted to Stock Exchange along with the Annual Report.

Conclusion
Although SEBI is a young institution but it has been fairly successful in fulfilment of its
mandate as capital market regulator, ensuring protection of various stakeholders and increasing
participation in capital formation. As per the need arise, SEBI has taken steps to ensuring fair
trading and investor protection. SEBI plays a vital role in compliance of governance by
corporate. A company that has good corporate governance has a much higher level of
confidence amongst the shareholders associated with that company. Active and independent
directors contribute towards a positive outlook of the company in the financial market,
positively influencing share prices. Corporate Governance is one of the important criteria for
foreign institutional investors to decide on which company to invest in. The corporate practices
in India emphasize the functions of audit and finances that have legal, moral and ethical
implications for the business and its impact on the shareholders. Amendments introduced by
SEBI in Clause 49 roved innovative measures to appropriately balance legislative and
regulatory reforms for the growth of the enterprise and to increase foreign investment. The
rules and regulations are measures that increase the involvement of the shareholders in decision
making and introduce transparency in corporate governance, which ultimately safeguards the
interest of the society and shareholders. Corporate governance safeguards not only the
management but the interests of the stakeholders as well and fosters the economic progress of
India in the roaring economies of the world.
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