Securities and Exchange Board of India (SEBI) which is a prime regulatory body for the Indian corporate spectrum has seen mostly corporate governance principles. SEBI was established under SEBI Act, 1992, its main objectives include protecting investors interest, developing the securities market and regulating its functioning[1]. SEBI’s role in the enforcement of corporate governance standards has grown in importance as corporate structures have developed complexities and transparency is needed. This blog will study how various regulations by case laws and SEBI’s enforcement mechanisms strengthen corporate governance across the country.
Table of Contents
Historical Context and Regulatory Framework
The creation of SEBI stemmed from the necessity of creating a robust regulatory framework in the wake of a few financial scandals that rocked investor confidence[2]. Clause 49’s introduction in the Listing Agreement was a significant step to regulate companies to a specific level of governance structure. By introducing such a clause, it established grounds for greater levels of corporate governance practices by focusing on board composition, audit committees and disclosure requirements[3].
NSE has the capability to influence and monitor the corporate governance within the listed companies and SEBI anyway exercises this influence through its regulations and guidelines on the listed companies[4]. Clause 49 has made it mandatory that at least one third of the board of a company should be independent directors. The requirement calls for making decisions without such undue influence of management in order to improve accountability[5]. Companies are also required to create audit committees that are made of completely independent directors overseeing financial reporting processes. These committees have a crucial role in making sure that applicable laws are adhered to and shareholder interests are protected[6].
The Companies Act, 2013 forms the backbone of corporate governance in India, supported by Clause 49, which aligns with SEBI guidelines to strengthen governance standards for listed companies. Section 166, for example, contains the fiduciary directors’ duties the directors must perform, thereby, they must act in the company’s best interest and avoid conflicts of interest[7]. During high profile cases such as the Anil Ambani led Reliance Home Finance Limited (RHFL) scandal where funds were misappropriated in personal gain rather than for shareholder benefit this section became extremely popular. Such breaches carry legal ramifications, and are a warning to directors not to act ethically[8].
Key Provisions Enhancing Corporate Governance
In addition, SEBI has also introduced a number of other provisions for improvement of corporate governance standards. For instance, Regulation 17 of the SEBI (Listing Obligations and Disclosure Requirements), 2015 mentions that listed companies should always have the minimum number of independent directors on the board. In addition to ensuring boards enjoy the diversity to challenge the management, this regulation ensures they also have independence to do so[9]. Further, Regulation 18 stipulates the mandate of the Audit Committee to oversee financial reporting and disclosures. Such an important role this committee plays in assuring that financial statements are free of material misstatements and conform to applicable laws and regulations. Assigning certain committees with oversight responsibilities, SEBI increases the accountability within corporations[10].
Regulation 30 additionally requires disclosure in a timely fashion regarding material events, material information or information that would affect shareholders’ decision. Investors can make their own educated investments by ensuring transparency in these requirements[11].
Case Laws Illustrating SEBI’s Role
Several landmark judgments have made it very clear that SEBI has certain powers and takes a bent of advertising towards corporate governance standards. A case of Securities and Exchange Board of India vs. Sahara India Real Estate Corporation Ltd[12]. In 2012, the Supreme Court ruled against the Sahara Group, demanding to return around ₹24,000 crores to investors for non compliance with regulatory mandates. This case shows that SEBI could enforce compliance and protect investors interests by taking the help of judicial intervention.
There is another notable case of BPL Limited vs. SEBI[13], where the BPL was found guilty of manipulating stock price during a false market and in conjunction with notorious market operator Harshad Mehta. If the four-year ban on market manipulation regulations that SEBI had levied against BPL for flouting regulations on the matter under SEBI Act, Section 11B, stood, then the Bombay High Court would have shaken out the root of the problem, the case being adjudicated upon. Cases like this show SEBI’s enthusiasm to take proactive action in support of imposition of strict governance norms on corporations.
Moreover, in SEBI vs. Shriram Mutual Fund[14] (2006), the apex court affirmed SEBI’s power to fine persons for breach of the securities laws without having to prove mens rea (mens rea). This judgment gave the regulatory power to sebi and fixed the precedent of strict liability in the securities regulation.
Enforcement Mechanisms
SEBI has a well-developed enforcement mechanism to check its regulations being complied with. It can punish big companies that don’t observe corporate governance as well as those indulging in fraudulent practices. For example, there are severe penalties attached to people or companies violating provisions regarding securities regulation under Section 24 of the SEBI Act[15]. The SEBI Act provides under Section 11 to the authority also to conduct investigations into suspected violations and proceed against errant companies or individuals. This section provides SEBI with power to act against those who disrupt investor interests or transgress securities regulations[16].
Judiciary is an important vehicle to enforce the regulatory framework set by SEBI by interpreting law and adjudicating on complaints of corporate governance violations. Since these landmark judgments, SEBI’s guidelines have become very crucial for compliance which has increased confidence of investors in the regulatory system[17].
Challenges Facing Corporate Governance
Though Indian corporate enterprise has already made significant strides in expanding corporate governance standards, there are still significant challenges that persist. It remains to be a major issue and still SEBI has taken stringent measures for detection and penalization yet cases of people using non-public information for their personal gains continue to exist. Even with increased reporting requirements, the risk of fraudulent financial reporting still persists, as companies may manipulate their financial statements to present a more favorable image than the reality. Examples of corporate governance lapses like these resulting in high profile scandals like Satyam Computer Services shows how such lapses can result in ruinous end results for investors and stakeholders alike[18].
Also there’s the challenge of getting shareholders involved; the problem is that shareholders come around to AGMs and do not perform well at the voting booths. SEBI must, however, look for ways to alleviate that problem through creative ways to incite shareholder involvement at AGMs and in decision making processes.
Conclusion
The SEBI has undeniably played a pivotal role in shaping and strengthening corporate governance in India. Through its comprehensive regulatory framework, proactive enforcement mechanisms, and landmark interventions, SEBI has fostered a culture of transparency, accountability, and ethical practices within corporate India. Measures such as Clause 49, the SEBI (LODR) Regulations, and its relentless efforts in enforcing compliance have elevated the governance standards of listed companies, thereby protecting investors and enhancing trust in the securities market[19]. However, challenges persist. Insider trading, fraudulent financial reporting, and a lack of shareholder participation are issues that continue to test the robustness of the system. SEBI must not only maintain its vigilance but also innovate to address these challenges effectively. Encouraging greater shareholder engagement, ensuring stricter compliance, and leveraging technology to monitor corporate behavior can be key focus areas for the future[20].
Ultimately, corporate governance is a shared responsibility. While SEBI can provide the regulatory backbone, it is up to corporations, directors, and shareholders to align with its principles and foster a governance culture that reflects integrity, fairness, and accountability[21]. By continuing to refine its regulations and taking lessons from global best practices, SEBI can help ensure that Indian corporations remain competitive, trustworthy, and resilient in the ever-evolving global market landscape
The Importance of Continuous Improvement
To further strengthen its role in enhancing corporate governance practices among listed entities, SEBI must focus on continuous improvement through regular assessments of existing regulations. Engaging with industry stakeholders—including corporates, legal experts, institutional investors—can provide valuable insights into potential gaps within current frameworks while identifying best practices from global markets.
Moreover, international cooperation with regulatory bodies such as the International Organization of Securities Commissions (IOSCO) can facilitate knowledge sharing on emerging trends and challenges faced by securities markets worldwide. By adopting a proactive approach towards evolving regulatory landscapes while remaining adaptable amidst changing economic conditions will enable SEBI not only to reinforce existing frameworks but also foster an environment conducive towards promoting ethical business conduct across India’s capital markets effectively.
This article has been authored by Ms. Pooja Reddy, student at Mahindra University, School of Law.
[1] Securities and Exchange Board of India Act, 1992
[2] Id. § 3.
[3] Clause 49 of the Listing Agreement, SEBI Circular No. SEBI/CFD/DIL/CG/1/2004/12/10 (Oct. 29, 2004)
[4] National Stock Exchange of India Ltd., Corporate Governance Framework, https://www.nseindia.com.
[5] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Reg. 17
[6] Id. Reg. 18
[7] Companies Act, No. 18 of 2013, § 166
[8] Reliance Home Finance Ltd. v. Anil Ambani, (2020) 5 SCC 1 (India)
[9] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Reg. 17.
[10] Id. Reg. 18
[11] Id. Reg. 30
[12] Sahara India Real Estate Corp. Ltd. v. SEBI, (2012) 10 SCC 603 (India)
[13] BPL Ltd. v. SEBI, (2003) 117 Comp Cas 537 (SAT)
[14] SEBI v. Shriram Mutual. Fund, (2006) 5 S.C.C. 361 (India)
[15] SEBI Act, § 24
[16] Id. § 11
[17] Supra note 12
[18] Satyam Computer Services Case, Ministry of Corporate Affairs, Government of India, https://www.mca.gov.in.
[19] “Corporate Governance in India: Challenges and Opportunities,” Indian Institute of Corporate Affairs
[20] Securities and Exchange Board of India v. Sahara India Real Estate Corporation Ltd. [2012] (Supreme Court of India); SEBI vs. Shriram Mutual Fund (2006)
[21] SEBI Act, Section 11; SEBI’s enforcement of fiduciary duties under the Companies Act, 2013
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