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SEBI and Corporate Governance: The Confluence


Capital Market in India and Regulation
An investment plays very important role for the economic growth. The investment shows the level of economy in the world economies. When a person deposits his/her money in a bank or buys the shares of a company, it can be said that it is an investment. In any country, the financial system plays as a mediator between lenders and borrowers. Always investors are needed adequate protection to encourage more savings and investments. Securities Exchange board of India was set by for this purpose.
In general, the financial market is divided into two parts, one is money market and another one is capital market. Money market provides short term finance while capital market provides medium and long term finance. Securities market is an organized capital market and is divided into as primary market and secondary market. The origin of the stock market in India started at the end of the eighteenth century. Initially long term negotiable securities were issued. The native share and stock brokers ' association was formed at Bombay in 1875, and is the precursor of present Bombay Stock Exchange. Subsequently several associations/exchanges in Ahmedabad (1894), Calcutta (1908), and Madras (1937) were formed.
As a regulatory body is needed to regulate and monitor the activities of stock exchanges, the Securities and Exchange Board of India (SEBI) was established by the Government of India in 1988 through an executive resolution. Subsequently it was made a fully autonomous statutory body in the year 1992 with the passing of the Securities and Exchange Board of India Act on 30th January 1992. SEBI has four different departments namely; primary department, issue management and intermediaries department, secondary department and institutional investment department. Before establishment of SEBI the capital markets were regulated by the Capital Issues (Control) Act of 1947. However, it did not have any statutory powers at that time and its role was limited to collection of investor-related information from various market participants, advising the government on issues related to stock markets and regulation of a few market entities.
The formal operations of the stock exchanges in India commenced in 1875. A lot of changes in the trading market took place during the various phases of development of capital market. Due to this, slowly, the small investors also were attracted towards the capital market. Still the securities market was largely unregulated, particularly, prior to independence. The major thrust of the securities market reforms has been on the improvement of the operations and efficiency of the markets. For this purpose, some structural changes have also taken place. Without the presence of effective regulators, the capital market may find it difficult to develop in a healthy manner.

SEBI as a Regulator of the Capital Market
SEBI’s regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. All market intermediaries are registered and regulated by SEBI. They are also required to appoint a compliance officer who is responsible for monitoring compliance with securities laws and for redressal of investor grievances. The SEBI has framed regulations under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, for prevention of unfair trade practices, and insider trading.
The SEBI has full autonomy and authority to regulate and develop the capital market. The government has framed rules under Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992 and Depositories Act, 1996. The Government and the SEBI issue notifications, guidelines and circulars which need to be complied with by market participants, and so that the public knows about them.
SEBI’s efforts are to create effective surveillance mechanism for the securities market, and encourage responsible and accountable autonomy on the part of all players the market that should discipline themselves and observe the rules of the game. This would be possible, if the intermediaries set themselves up as effective self-regulatory bodies. Self-regulation is therefore the cornerstone of the regulatory framework advocated by SEBI.
However, self-regulation can work only if there is an effective regulatory body overseeing activities of self-regulatory organizations. Thus SEBI endeavors to provide a controller structure for effective mobilization and allotment of wealth through the securities market.

Corporate Governance
A corporation is a made up of various stakeholders, namely, customers, employees, investors, vendor partners, government and society. So it should be fair and transparent to its stakeholders in all its transactions. Corporate Governance ensures the benefit of all stakeholders, which results in the benefit of the corporate. Corporate governance is about ethical conduct in business and ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action. Corporations need to recognize that their growth requires the cooperation of all the stakeholder and such cooperation is enhanced by the corporation adhering to the best corporate governance practices.
Corporate governance is beyond the realm of law. It deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability, thus involves a moral duty. What legislation can and should do is to lay down a common framework – the “form” to ensure legal standards of this moral duty.
The relationships of the Board and management shall be characterized by sincerity; their relationships with employees shall be characterized by fairness; their relationships with the communities in which they operate shall be characterized by good citizenship; and their relationships with government shall be characterized by a commitment to compliance. Good corporate governance also helps ensure that corporations take into account the interests of a wide range of constituencies, as well as of the communities within which they operate. Further, it ensures that their Boards are accountable to the shareholders. Evidence suggests that companies that do not employ meaningful governance procedures can pay a significant risk premium when competing for scarce capital in the public markets.

Role of SEBI in corporate governance
SEBI is the capital market regulator in India and has been active in recent years in its efforts to usher in a standard form of corporate governance. The Accounting Standards Committee of the SEBI as well as the Kumar Mangalam Birla Committee (2000) on Corporate Governance has identified three key aspects of corporate governance: accountability, transparency and equality of all stakeholders. These three main aspects are fulfilled and ensured by the role of SEBI.
SEBI had set up an Accounting Standards Committee to review the continuous disclosure requirements under the listing agreement for listed companies. SEBI has been closely interacting with the ICAI to ensure that Indian accounting standards are at par with international practices. Thus, SEBI promotes transparency among the companies and ensures fulfillment of one of the key aspects of corporate governance. The SEBI Board decided that henceforth no stock broker member of any stock exchange shall be an office bearer of the exchanges i.e., hold the position of president, vice-president, treasurer etc. This decision of SEBI in regard to corporate governance promoted accountability among key persons of company.
The issue of corporate governance involves besides shareholders, all other stakeholders. Thus corporate governance is from the point of view of the stakeholders and in particular that of the shareholders and investors, because they are the raison de etre for corporate governance and also the prime constituency of SEBI.
Companies need to disclose as per law, information in their annual reports which will enable shareholders to know, where the companies, in which they have invested, stand with respect to specific initiatives taken to ensure robust corporate governance.
The Securities and Exchange Board of India (SEBI) Act, 1992 established the independent capital market regulatory authority, SEBI, with the objective to protect the interests of investors in securities, and promote and regulate the securities market.
Corporate governance initiatives in India began in 1998 with the Desirable Code of Corporate Governance, a voluntary code published by the CII, and the first formal regulatory framework for listed companies specifically for corporate governance, established by the SEBI. The latter was made in February 2000, following the recommendations of the Kumarmangalam Birla Committee Report.
The recommendations of the committee were divided into mandatory and non-mandatory categories. The mandatory recommendations led the Securities and Exchange Board of India to revise the clause 49 of the listing agreement that deals with Corporate Governance and states the corporate governance practices that listed companies must follow. The revised clause 49(1) stipulates inter alia that a code of conduct for all the Board Members and Senior Management (Members of Core Management Committee, including all Functional Heads) must be laid down and this should be posted in the website of the company. The Securities and Exchange Board at its Board Meeting held on 25th April, 2006 adopted the code of conduct and made it applicable to all members of Company Boards and Senior Management Personnel to enhance the smooth running of all corporate bodies.
Financial disclosure is a critical component of effective corporate governance. Hence SEBI guidelines for the same are Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.


Due to the dynamics of markets, the standards of corporate governance are evolving continuously and thus efforts to improve those standards must continue too.There is a need for ethical governance and management, and for the need to look beyond mere systems and procedures. This will ensure compliance with corporate governance codes, in substance and not merely in form. One of the goals of good corporate governance is investor protection, which the objective with which SEBI was set up. The individual investor is the most vulnerable person as he is at the end of a chain of financial information. This chain has all the players involved including the management, directors, auditors, brokers, analysts and members of public investing in the stock market. Many of the links in this chain need to be strengthened or replaced to preserve its integrity and thus protect the interest of the investors. Therefore the exiting norms of SEBI on corporate governance can be reviewed from two perspectives, first to evaluate the adequacy of the existing practices, and to further improve the existing practices, for the efficient and effective norms of corporate governance to be in our country and develop the corporates.

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