SEBI issues consultative paper on Review Of Corporate Governance Norms in India

Concept of Corporate Governance
"Corporations pool capital from a large investor base both in the domestic and in the international capital markets. In this context, investment is ultimately an act of faith in the ability of a corporation’s management. When an investor invests money in a corporation, he expects the board and the management to act as trustees and ensure the safety of the capital and also earn a rate of return that is higher than the cost of capital. In this regard, investors expect management to act in their best interests at all times and adopt good corporate governance practices.

Corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the
management of a company.”1

Evolution of Corporate Governance framework in India:

Companies Act, 1956 provides for basic framework for regulation of all the companies. Certain provisions were incorporated in the Act itself to provide for checks and balances over the powers of Board viz.:

Loan to directors or relatives or associated entities (need CG permission) (Sec 295)
Interested contract needs Board resolution and to be entered in register (Sec 297)
Interested directors not to participate or vote (Sec 300)
Appointment of director or relatives for office or place of profit needs approval by shareholders. If the remuneration exceeds prescribed limit , CG approval required

(Sec 314)
Audit Committee for Public companies having paid-up capital of Rs. 5 Crores (Sec 292A) Shareholders holding 10% can appeal to Court in case of oppression or mismanagement (397/398).
In Companies Act, 1956, SEBI has been given power only to administer provisions pertaining to issue and transfer of securities and non-payment of dividend.

Apart from the basic provisions of the Companies Act, every listed company needs to comply with the provisions of the listing agreement as per Section 21 of Securities Contract Regulations Act, 1956. Non-compliance with the same, would lead to delisting under Section 22A or monetary penalties under Section 23 E of the said Act.

Further, SEBI is empowered under Section 11 and Section 11A of SEBI Act to prescribe conditions for listing. However, Section 32 of the SEBI Act, 1992 states that the provisions of the SEBI Act, 1992 shall be in addition to, and not in derogation of, the provisions of any other law for the time being in force.

Considering the emergence of code of best Corporate Governance practices all over the world (like Cadbury Greenbury and Hampel Committee reports), in 1999, SEBI constituted a Committee on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Birla, to promote and raise the standard of Corporate Governance in respect of listed companies. SEBI’s Board, in its meeting held on January 25, 2000, considered the recommendations of the Committee and decided to make the amendments to the listing agreement on February 21, 2000 for incorporating the recommendations of the committee by inserting a new clause in the Equity Listing Agreement – i.e. Clause 49.

Subsequently, after Enron, WorldCom, and other corporate governance catastrophes, SEBI felt that there was a need to improve further the level of corporate governance standards in India and constituted a second corporate governance committee chaired by Narayana Murthy, of Infosys Technologies Limited. Based on the recommendations of the aforesaid Committee, SEBI issued a circular on August 26, 2003 revising Clause 49 of the Listing Agreement. Based on the public comments received thereon and the revised recommendations of the Committee, certain provisions of the regulatory framework for corporate governance were modified and relevant amendments were made to Clause 49 of the Listing Agreement. The revised clause 49 superseded all the earlier circulars on the subject and became effective for listed companies from January 01, 2006. It is applicable to the entities seeking listing for the first time and for existing 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.

Clause 49:

Clause 49 of the Equity Listing Agreement consists of mandatory as well as nonmandatory provisions. Those which are absolutely essential for corporate governance can be defined with precision and which can be enforced without any legislative amendments are classified as mandatory. Others, which are either desirable or which may require change of laws are classified as non-mandatory. The non-mandatory requirements may be implemented at the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance) / non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.

OECD Principles on Corporate Governance are as follows:
Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

The corporate governance framework
should promote transparent and efficient markets,
be consistent with the rule of law and
clearly articulate the division of responsibilities among different supervisory,
regulatory and enforcement authorities

Principle II: The Rights of Shareholders and Key Ownership Functionsprotected and facilitated
protect and facilitate the exercise of shareholders’ rights

Principle III: The Equitable Treatment of Shareholders
Should ensure the equitable treatment of all shareholders
opportunity to obtain effective redress for violation of their rights

Principle IV: The Role of Stakeholders in Corporate Governance- recognized should recognise the rights of stakeholders
encourage co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of enterprises
Principle V: Disclosure and Transparency
Timely and accurate disclosure is made on all material matters including the financial situation, performance, ownership, and governance of the company.