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Regulatory framework for Corporate Governance in India

Regulatory framework for Corporate Governance in India

  • As a part of the process of economic liberalization in India, and the move toward further development of India’s capital markets, the Central Government established regulatory control over the stock markets through the formation of the SEBI.
  • Originally established as an advisory body in 1988, SEBI was granted the authority to regulate the securities market under the Securities and Exchange Board of India Act of 1992 (SEBI Act).
  • Public listed companies in India are governed by a multiple regulatory structure. The Companies Act is administered by the Ministry of Corporate Affairs (MCA), and is currently enforced by the Company Law Board (CLB).                  Regulatory framework for Corporate Governance in India
  • The MCA, SEBI, and the stock exchanges share jurisdiction over listed companies, with the MCA being the primary government body charged with administering the Companies Act of 1956, while SEBI has served as the securities market regulator since 1992.

SEBI services

  • SEBI serves as a market-oriented independent entity to regulate the securities market akin to the role of the Securities and Exchange Commission (SEC) in the United States.
  • The stated purpose of the agency is to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.
  • The realm of SEBI’s statutory authority has also been the subject of extensive debate and indeed some people have raised doubts as to whether SEBI can make regulations in respect of matters that rightfully fall within the jurisdiction of the Department of Company Affairs.
  • SEBI’s authority for carrying out its regulatory responsibilities has not always been clear and when Indian financial markets experienced massive share price rigging frauds in the early 1990s, it was found that SEBI did not have sufficient statutory power to carry out a full investigation of the frauds.
  • Accordingly, the SEBI Act was amended in order to grant it sufficient powers with respect to inspection, investigation, and enforcement, in line with the powers granted to the SEC in the United States.
  • A contentious aspect of SEBI’s power concerns its authority to make rules and regulations.
  • While SEBI has made significant amendments to the Listing Agreement to substantially increase the responsibilities of listed companies, some have disputed that SEBI was ever granted the authority to impose additional governance rules in this fashion.
  • Unlike in the United States, where the SEC can point to the Sarbanes-Oxley Act, which specifically confers upon it the authority to prescribe rules to implement governance legislation, SEBI, on the other hand, cannot point to a similar piece of legislation to support the imposition of the same requirements on Indian companies through Clause 49.              Regulatory framework for Corporate Governance in India
  • Instead, SEBI can look to the basics of its own purpose, as given in the SEBI Act, wherein it is granted the authority to “specify, by regulations, the matters relating to issue of capital, transfer of securities and other matters incidental thereto . . and the manner in which such matters shall be disclosed by the companies.”
  • In addition, SEBI is granted the broad authority to “specify the requirements for listing and transfer of securities and other matters incidental thereto.”

Referring to a similar case of jurisdictional overlap between the RBI and the MCA, the Committee has suggested that it needs to be appropriately articulated in the Bill that the Companies Act will prevail only if the Special Act is silent on any aspect.

Further the Committee suggested that if both are silent, requisite provisions can be included in the Special Act itself and that the status quo in this regard may, therefore, be maintained and the same may be suitably clarified in the Bill.

This, in the Committee’s view, would ensure that there is no jurisdictional overlap or conflict in the governing statute or rules framed there under.                      Regulatory framework for Corporate Governance in India