Corporate governance series- Part 3: SEBI reforms on Corporate Governance. - Gaurav Bansal

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  • Published
    20th Dec, 2018


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 standards of Corporate Governance in respect of listed companies.

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 Mr. 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. Gist of Cause 49 is as follows:

Mandatory provisions comprise of the following:

  • Composition of Board and its procedure - frequency of meeting, number of independent directors, code of conduct for Board of directors and senior management;
  • Audit Committee, its composition, and role;
  • Provision relating to Subsidiary Companies o Disclosure to Audit committee, Board and the Shareholders;
  • CEO/CFO certification o Quarterly report on corporate governance o Annual compliance certificate.

Non-mandatory provisions consist of the following:

  • Constitution of Remuneration Committee
  • Despatch of Half-yearly results
  • Training of Board members
  • Peer evaluation of Board members
  • Whistle Blower policy

OECD Principles on Corporate Governance:

OECD, in its endeavour to improve the governance practices, had published its revised principles 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.

These principles have advanced the corporate governance agenda and provided specific guidance for legislative and regulatory initiatives in both member and non-member countries. Indian Corporate Governance Framework is in compliance with the Corporate Governance principles of OECD. The Financial Stability Forum has designated the Principles as one of the 12 key standards for sound financial systems. 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

  • 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.

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

  • should ensure the strategic guidance of the company,
  • the effective monitoring of management by the board, and,
  • board’s accountability to the company and the shareholders.

Policy steps taken by SEBI for ensuring better governance in listed companies in the aftermath of Satyam scam: The introspection that followed the Satyam episode has resulted in some major changes in Indian corporate governance regime. Some of the recent steps taken in this regard are as follows:

  • Disclosure of pledged shares: It is made mandatory on the part of promoters (including promoter group) to disclose the details of pledge of shares held by them in listed entities promoted by them.
  • Peer review: In the light of developments with respect to Satyam SEBI carried out a peer review exercise of the working papers (relating to financial statements of listed entities) of auditors in respect of the companies constituting the NSE – Nifty 50, the BSE Sensex and some listed companies outside the Sensex and Nifty chosen on a random basis.
  • Disclosures regarding agreements with the media companies: In order to ensure public dissemination of details of agreements entered into by corporates with media companies, the listed entities are required to disclose details of such agreements on their websites and also notify the stock exchange of the same for public dissemination.
  • Maintenance of website
  • Compulsory dematerialization of Promoter holdings: In order to improve transparency in the dealings of shares by promoters including pledge / usage as collateral, it is decided that the securities of companies shall be traded in the normal segment of the exchange if and only if, the company has achieved 100% of promoter’s and promoter group’s shareholding in dematerialized form.
  • Peer reviewed Auditors: It has been decided that in respect of all listed entities, limited review/statutory audit reports submitted to the concerned stock exchanges shall be given only by those auditors who have subjected themselves to the peer review process of ICAI and who hold a valid certificate issued by the ‘Peer Review Board’ of the said Institute;
  • Approval of appointment of ‘CFO’ by the Audit Committee
  • Disclosure of voting results: listed entities are required to disclose the voting results/ patterns on their websites and to the exchanges within 48 hours from the conclusion of the concerned shareholders’ meeting.
  • Enabling shareholders to electronically cast their vote
  • Manner of dealing audit reports filed by listed entities

Learning Aid

Practise question:

Examine the importance of corporate governance. Elaborate on their evolution in post-reforms period.


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