Indian Regulators Tackle Corporate Governance Reforms in the New Year

Categories: Corporate Governance

Many in the finance industry in India would agree that they were inundated with new financial regulations in 2012. But for a very obvious reason, although Indian markets performed better than other emerging markets, trust and integrity in the market had to be revived. In response, regulators including the Stock Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have set themselves on a fast pace of reforms to improve corporate governance practices.

The Companies Bill 2012, which seeks to replace the 55-year-old Indian Companies Act, was passed in December 2012 by the Lok Sabha (the lower house of the Indian Parliament) and now proceeds to the upper house (the Rajya Sabha) for approval. Various new provisions are included in the bill, aimed at improving the governance of public companies. In the meantime, SEBI issued a concept paper last week to encourage a wider debate on governance requirements for listed companies and the adoption of better global practices, in accordance with Organisation for Economic Co-operation and Development (OECD) principles of governance.

Meanwhile, SEBI is planning a hybrid approach to Clause 49 of its guidelines on corporate governance, meaning it will adopt a “principle-based” or “comply-or-explain” approach for some codes while other mandatory compliance may require a “rule-based” approach. We agree that the “hybrid” approach to corporate governance rules has the potential to work well, though care must be taken to choose which standards become mandatory and which are left to the company’s discretion.

Among other proposals, the paper debates radical changes to rules surrounding the appointment and training of independent directors, mandating a maximum tenure and subjecting them to regular performance evaluations and requiring they disclose reasons for their resignation. The paper recommends a lead independent director and separating the positions of chairman and managing director. This might lead to changes in the structure of Indian companies that are mainly family-owned conglomerates. SEBI’s initiatives are also aimed at improving disclosure of remuneration policies and avoiding abusive related-party transactions.

For our part, CFA Institute believes evaluating and monitoring corporate governance practices, and their associated risks, is an important aspect of the investment process, as outlined in our publication The Corporate Governance of Listed Companies: A Manual for Investors, Second Edition. The publication is designed to help investors understand the three broad areas of governance: the board, management, and shareowner rights. Within each category, the manual offers practical guidance on specific issues without creating another set of governance best practices, or advocating for one governance system over another.

We look forward to officially responding to the proposal, in conjunction with the Indian Association of Investment Professionals (IAIP), and highlighting our policies and global best practices. We applaud SEBI for taking on an important cause in 2013.

Watch this space for additional updates.

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