ABSTRACT

Topic: Corporate Governance and SEBI with Organization for Economic Cooperation and Development

Authors:1. Smitha.K.B

Bapuji Academy of Management and Research,

Bapuji B- Schools,

Davangere.

Mobile: 09538525410

Email id: smithakb.kb@gmail.com

2. Vaishnavi. B

Bapuji Academy of Management and Research,

Bapuji B- Schools,

Davangere.

Mobile: 09972205946

Email id: vaishnavib930@gmail.com

3. Sujith Kumar

Bapuji Academy of Management and Research,

Bapuji B- Schools,

Davangere.

Mobile:

Email id: shsujith@yahoo.com, shsujith@gmail.com

Corporate Governance and SEBI with Organization for Economic Cooperation and Development

Smith.K.B* B. Vaishnavi**Mr. Sujith Kumar***

The Securities and Exchange Board of India (SEBI) had released its ‘Consultative Paper on Review of Corporate Governance Norms in India’ to align the existing corporate governance norms in India with the then existing Companies Bill, 2012 and other international practices. Consequent to the enactment of the Companies Act, 2013 (‘the Act’), the SEBI Board has on 13 February 2014, approved the proposals to amend the corporate governance norms for listed companies in India. The amendments shall be applicable to all listed companies with effect from 1 October 2014.

OECD along with SEBI formed Principles on Corporate Governance:OECD, in its endeavor to improve the governance practices, had published its

revisedPrinciples on Corporate Governance in 2002. The OECD Principles of Corporate Governance have since become an international benchmark for policy makers, investors, Corporations and other stakeholders worldwide. They have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both member and non-member countries. The Financial Stability Forum has designated the Principles as one of the 12 key standards for sound financial systems.

Objective: Corporate governance is the acceptance by management of the inalienable rights

ofshareholders 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.

Need for the Study: To know about the impact of corporate governance in corporate under the guidance of SEBI.

Key words: OECD, SEBI, CORPORATE GOVERNANCE

*Student, Bapuji Academy of Management and Research, Bapuji B- Schools, Davangere

** Student,Bapuji Academy of Management and Research, Bapuji B- Schools, Davangere

*** Faculty,Bapuji Academy of Management and Research, Bapuji B- Schools, Davangere

Corporate Governance and SEBI with Organization for Economic Cooperation and

Development

INTRODUCTION :

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.

SEBI:

SEBI was a non-statutory body without any statutory power. However, in 1995, the SEBI

was given additional statutory power by the Government of India through an amendment to

the Securities and Exchange Board of India Act, 1992. In April 1988 the SEBI was constituted as

the regulator of capital markets in India under a resolution of the Government of India.

The SEBI is managed by its members, which consists of following:

1. The chairman who is nominated by Union Government of India.

2. Two members, i.e., Officers from Union Finance Ministry.

3. One member from the Reserve Bank of India.

4. The remaining five members are nominated by Union Government of India, out of them

at least three shall be whole-time members.

OECD:

OECD, in its endeavor to improve the governance practices, had published its

revisedprinciples on Corporate Governance in 2002. The OECD Principles of Corporate

Governance have since become an international benchmark for policy makers, investors,

corporations and other stakeholders worldwide. They have advanced the corporate governance

agenda and provided specific guidance for legislative and regulatory initiatives in both member

and non-member countries.

OECD Principles on Corporate Governance are as follows:

Principle I: Ensuring the Basis for an Effective Corporate GovernanceFramework

Principle II: The Rights of Shareholders and Key Ownership Functions protected and

facilitated

Principle III: The Equitable Treatment of Shareholders

Principle IV: The Role of Stakeholders in Corporate Governance- recognized

Principle V: Disclosure and Transparency

Principle VI: The Responsibilities of the Board-Monitoring Management and Accountability

to Shareholders.

Committees Appointed by SEBI on Corporate GovernanceN R Narayanamurthy Committee, 2003:

“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.”

Key Issues Discussed and Recommendations of SEBI Committee:

Audit Committees:

Suggestions were received from members that audit committees of publicly listed companies

should be required to review the following information mandatorily:

· Financial statements;

· Management discussion and analysis of financial condition and results of operations

· Reports relating to compliance with laws and to risk management;

· Management letters / letters of internal control weaknesses issued by

· Statutory / Internal Auditors; and

· Records of related party transactions.

Mandatory recommendation:

Audit committees of publicly listed companies should be required to review the following

information mandatorily:

· Financial statements and draft audit report, including quarterly / half-yearly financial

information;

· Management discussion and analysis of financial condition and results of operations;

· Reports relating to compliance with laws and to risk management;

· Management letters / letters of internal control weaknesses issued by statutory internal auditors;

· Records of related party transactions.

Shri Kumar Mangalam Birla Committee :

The Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate

Governance on May 7, 1999 under the Chairmanship of Shri Kumar Mangalam Birla, member

SEBI Board, to promote and raise the standards of Corporate Governance.

This Report is the first formal and comprehensive attempt to evolve a Code of Corporate

Governance, in the context of prevailing conditions of governance in Indian companies, as well

as the state of capital markets. While making the recommendations the Committee has been

mindful that any code of Corporate Governance must be dynamic, evolving and should change

with changing context and times.

It would therefore be necessary that this code also is reviewed from time to time, keeping

pacewith the changing expectations of the investors, shareholders, and other stakeholdersand

with increasing sophistication achieved in capital markets.

Corporate Governance –the Objective:

This Report on Corporate Governance has been prepared by the Committee for SEBI, keeping in

view primarily the interests of a particular class of stakeholders, namely, the shareholders, who

together with the investors form the principal constituency of SEBI while not ignoring the needs

of otherstakeholders.

The Committee therefore agreed that the fundamental objective of corporate governance is the

"enhancement of shareholder value, keeping in view the interests of other stakeholder". This

definition harmonizes the need for a company to strike a balance at all times between the need to

enhance shareholders’ wealth whilst not in any way being detrimental to the interests of the other

stakeholders in the company.

In the opinion of the Committee, the imperative for corporate governance lies not merely in

drafting a code of corporate governance, but in practicing it. Even now, some companies are

following exemplary practices, without the existence of formal guidelines on this subject.

Structures and rules are important because they provide a framework, which will encourage and

enforce good governance; but alone, these cannot raise the standards of corporate governance.

What counts is the way in which these are put to use.

The Committee is thus of the firm view, that the best results would be achieved when the

companies begin to treat the code not as a mere structure, but as a way of life.

It follows that the real onus of achieving the desired level of corporate governance, lies in the

proactive initiatives taken by the companies themselves and not in the external measures like

breadth and depth of a code or stringency of enforcement of norms. Theextent of discipline,

transparency and fairness, and the willingness shown by the companies themselves in

implementing the Code, will be the crucial factor in achieving the desired confidence of

shareholders and other stakeholders and fulfilling the goals of the company.

The Committee has identified the three key constituents of corporate governance asthe

Shareholders, the Board of Directors and the Management and has attempted toidentify in

respect of each of these constituents, their roles and responsibilities as also their rights in the

context of good corporate governance. Fundamental to this examination and permeating

throughout this exercise is the recognition of the three key aspects of corporate governance,

namely; accountability, transparency and equality of treatment for all stakeholders.

The Committee therefore recommends that a qualified and independent audit committee should

be set up by the board of a company. This would go a long way in enhancing the credibility of

the financial disclosures of a company and promoting transparency. This is a mandatory

recommendation.

The Committee recommends that the half-yearly declaration of financial performance including

summary of the significant events in last six-months, should be sent to each household of

shareholders. This is a non-mandatory recommendation.

SEBI’s Corporate Governance norms under Companies Act 2013:

The Companies Act, 2013 was enacted on August 30, 2013 which provides for a major overhaul

in the Corporate Governance norms for all companies. Currently, only 98 sections have been

notified and the remaining sections are due for notification by MCA after the rules for the same

would be finalized. The provisions of the Companies Act, 1956 still applies for the remaining

sections which have not been notified.

The requirements under the Companies Act, 2013 would be minimum applicable for every

company or a class of companies (both listed and unlisted) as may be provided therein. It is

proposed to align the provisions of the Listing Agreement with the provisions of the Companies

Act, 2013, to retain certain provisions which are more stringent than the provisions in the

Companies Act, 2013 and also to prescribe additional conditions which may not have a reference

in the Companies Act, 2013. It is for information that in the past as well, SEBI had prescribed

additional requirements for listed companies over and above the provisions of the Companies

Act, 1956.

Clarity and transparency of financial statements is critical to investor confidence. In this context

broadening the definition of related party transactions, and creating greater oversight over such

transactions via a prior approval from either the audit committee or shareholders, will increase

chances that such transactions are undertaken at arm’s length.

This will be far easier for minority shareholders to have their say with the implementation of e-

voting for all resolutions for the top 500 companies (by market capitalization).

Till now resolutions were usually being passed at annual general meetings by a show of hands,

which meant votes were counted based on shareholders being physically present.

With the implementation of e-voting, investors can now truly vote their shareholding without

undertaking any ‘AGM tourism.’

The CG norms also bring in the much-needed focus on the board of directors, its composition

and its operations.

Curtailing the terms of independent directors to not more than two terms of five years each,

having a woman director on board, not counting nominee directors as independent and not

allowing stock options to independent directors are some of the measures that have brought

greater alignment between the Listing Agreement and the Companies Act 2013.

An annual appraisal of directors’ performance will increase focus on the board’s functioning and

mandating succession planning will ensure companies think ahead.

A summary of Sebi’s corporate governance norms vis-à-vis the Companies Act 2013:

Proposals: Independent director can be on the board of maximum seven listed companies and three in case the person is serving as a whole-time director in a listed companyCompanies Act and draft rules: 10 public companies. No separate provision for listed companies

Proposals: Whistle blower policy made mandatoryCompanies Act and draft rules: Yes

Proposals:  Succession policyCompanies Act and draft rules: Not specified

Proposals:  Independent director: Maximum two terms of five years eachCompanies Act and draft rules: Yes

Proposals:  ID tenure to be computed on retrospective basisCompanies Act and draft rules: It has been specified that it should not be applied retrospectively

Proposals:  No stock options for IDCompanies Act and draft rules: Yes

Proposals:  Nominee director not to be treated as independentCompanies Act and draft rules: Yes

Proposals:  Prior approval of audit committee for all material-related party transactionsCompanies Act and draft rules: Not specified

Proposals:  Performance evaluation of independent directors and the board of directors    Companies Act and draft rules: Yes

Proposals:  Separate meeting of independent directors    Companies Act and draft rules: Yes

Proposals:  Constitution of stakeholders relationship committeeCompanies Act and draft rules: Yes

Proposals:  Enhanced disclosure of remuneration policies Companies Act and draft rules: Yes

Proposals:  Approval of all material-related party transactions by shareholders via special resolution with related parties abstaining from voting    Companies Act and draft rules: Yes

Proposals:  Mandatory constitution of Nomination and Remuneration Committee. Chairman of the said committees shall be independent.   Companies Act and draft rules: Yes. Chairman independence not necessary

Proposals:  At least one woman director on the board of the companyCompanies Act and draft rules: Yes

Proposals:  Scope of the definition of material-related party transactions has been widened to include elements of Companies Act and accounting standardsCompanies Act and draft rules: Not clarified

Proposals:  E-voting facility by top 500 companies by market capitalization for all shareholder resolutionsCompanies Act and draft rules: Not mandatory

Proposals:  Providing training to independent directorsCompanies Act and draft rules: Not specified

Most of the proposals approved by the SEBI are in line with the requirements of the Companies Act, 2013 and would be effective from 1 October 2014. Some of the proposals also provide additional requirements to strengthen the corporate governance framework for listed companies in India.

The Second Phase of Reform: Corporate Governance after Satyam :

India’s corporate community experienced a significant shock in January 2009 with damaging

revelations about board failure and colossal fraud in the financials of Satyam.

The Satyam scandal also served as a catalyst for the Indian government to rethink the corporate

governance, disclosure, accountability and enforcement mechanisms in place.38 As described

below, Indian regulators and In late 2009, a CII task force put forth corporate governance reform

recommendations.

In addition to the CII, the National Association of Software and Services Companies

(NASSCOM, self described as “the premier trade body and the chamber of commerce of the IT-

BPO industries in India”)43 also formed a Corporate Governance and Ethics Committee, chaired

by N. R. Narayana Murthy, one of the founders of Infosys and a leading figure in Indian

corporate governance reforms.44 The Committee issued its recommendations

in mid-2010, focusing on stakeholders in the company. The report emphasizes recommendations

related to the audit committee and a whistleblower policy. The report also addresses improving

shareholder rights. The Institute of Company Secretaries of India (ICSI) has also put forth a

series of corporate governance recommendations.

Government response Satyam prompted quick action by both SEBI and the MCA.

SEBI actions:In September 2009 the SEBI Committee on Disclosure and Accounting Standards issued a

discussion paper that considered proposals for:

Appointment of the chief financial officer (CFO) by the audit committee after assessing the

qualifications, experience and background of the candidate;

Rotation of audit partners every five years;

Voluntary adoption of International Financial Reporting Standards (IFRS);

Interim disclosure of balance sheets (audited figures of major heads) on a half-yearly basis;

Streamlining of timelines for submission of various financial statements by listed entities as

required under the Listing Agreement.

Conclusion:

Since the late 1990s, significant efforts have been taken by Indian regulators, as well as by

Indian industry representatives and companies, to overhaul Indian corporate governance. Not

only have reform measures been put into place prior to discovery of major corporate governance

scandals, but both industry groups and government actors have sprung into action following the

Satyam scandal. The current corporate governance regime in Indian straddles both voluntary and

mandatory requirements. For listed companies, the vast majority of Clause 49 requirements are

mandatory. It remains to be seen whether some of the more recent voluntary corporate

governance measures will become mandatory for all companies through a comprehensive

revision of the Companies Act.

There are several corporate governance structures available in the developed world, but there is

no one structure, which can be singled out as being better than the others. There is no “one size

fits all” structure for corporate governance. The Committee’s recommendations are not,

therefore, based on any one model, but, are designed for the Indian environment. Corporate

governance extends beyond corporate law. Its fundamental objective is not mere fulfilment of the

requirements of law, but, in ensuring commitment of the Board in managing the company in a

transparent manner for maximizing long-term shareholder value.