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An Overview Of Corporate Governance In Capital Market

India In Development Of Corporate Governance

In the year 2009, Corporate Governance Voluntary Guidelines were introduced by the Ministry of Corporate Affairs to improve corporate governance practices in Indian listed companies and the initiatives of corporate governance have been undertaken by Ministry as well as SEBI. Corporate Governance in India is basically a set on internal controls, policy and procedures which forms the framework of a company's operations and its dealings with various stakeholders in both good and bad times.

The very first phase of India's corporate governance reforms were focused at making Audit Committees and Boards more independent, focused and powerful supervisor of management. On account of the interest generated by the Cadbury Committee Report, various committees were constituted by the CII, ASSOCHAM and SEBI for recommending initiatives in the Corporate Governance. As the largest number of listed companies are in India[1], therefore the well being and efficiency of the financial markets I critical for the economy as well as for the society as a whole.

According to a report prepared by India Forensic Consultancy Services (ICS), the financial results were forged by at least 1200 companies that are listed on the domestic stock exchanges. According to the study titled 'Early Warning Signals of Corporate Frauds,' inappropriate accounting includes delaying revenue and exaggerating expenses. The poll looked at 4,867 BSE-listed firms and 1,288 NSE-listed enterprises.[2]

With the emergence of the Satyam fraud, the report does not appear unlikely. "Satyam is simply one component of all those firms that are involved in similar frauds," says Mayur Joshi (the founder of India forensic Consultancy Firm).

Companies are engaging in financial statement frauds with the goal of beating analysts' expectations, according to more than 73% of respondents in our report Early Warning Signals of Corporate Frauds.[3]Through 'creative compliance' with legal requirements, adversarially-trained lawyers frequently assist in the avoidance and evasion of corporate liabilities.[4]

With the demand for more Foreign Direct Investment and the entry of transnational and multinational corporations into the country, a need for better accountability and investor protection arose, and Corporate Governance standards became essential for evaluating the securities market. The Confederation of Indian Industries took the first step in this direction in 1996, when it launched a special effort on Corporate Governance, which was the first institutional endeavor in Indian industry.

The goal was to create and promote a Corporate Governance code that Indian enterprises could adopt and follow, whether they were in the private sector, the public sector, banks, or financial institutions, all of which are corporate entities.[5] The code, on the other hand, concentrated on listed corporations for the simple reason that they are predominantly financed by public funds (either equity or debt) and, as a result, must adhere to regulations and policies that make them more accountable and value-oriented to their shareholders.

Instead of employees, local communities, suppliers, or ancillary entities, the shareholders and creditors were given priority. In light of this, India's Corporate Governance policy focuses on legislating norms rather than relying on ethical judgement.

Capital Markets, Corporate Governance And India

If we look back to 1990s, the policies of liberalization and globalization mainly emphasized on the stock market. In 2003, A. B. Vajpayee, the then prime minister, motivated the people of the country to put their savings in shares and bonds and to make productive investments. More recently, Manmohan Singh, called upon government-owned companies to go in for listing on stock exchanges. This shows that government policies are aiming towards stock-market driven model of corporate governance.

Corporate Governance became significant in India because of the scams that happened since liberalization from 1991, Harshad Mehta scam, Ketan Parekh scam, and most recently Satyam Fraud. Further developed corporate governance is the key objective of the administrative structure in the securities market.[6]

The company law in India has also marked a shift towards a stock market model and included within it various provisions related to corporate governance. But despite so much inspiration, the inflow of capital into the stock market is less to manage India's foreign exchange management. From 1990 to 2006, India was in constant deficit. To sustain these large number of deficits, India had to work on attracting portfolio investments. From 2004, Indian stock market has shown a tremendous rise which in turn led to economic growth, attracting a greater number of foreign investors.

Capital inflows through stock market had helped India in balancing all the deficits. In the event that the development in import/export imbalance is any sign, India's reliance on portfolio speculations could increment in the years to come. These elements would, thus, impact the country's approaches towards corporate Governance and capital market sectors.[7] Further, the advancement of capital market is reliant upon great corporate Governance without which investors don't rest the trust in the organizations.

The organizations should amplify the investors worth and riches. Later on, India introduced various reforms for improving corporate governance in capital markets. Ministry of Corporate Affairs published 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business'-

The rules make it required for the recorded organizations to document Business Responsibility Report (BRR) to improve the nature of exposures (SEBI Circular, 2012). Companies Act 2013 was enacted and companies act 1956 was replaced and intends to further develop corporate Governance principles to work on guidelines and improve the interests of minority investors.

India is among the principal country to carry out required Corporate Social Responsibility (CSR) spending and this Indian model will set priority for different nations on the planet, for vital execution of corporate Governance strategies. According to the most recent amendment in 2014, provision 49[8] incorporates protection of shareholders rights, proper and timely disclosures, equitable treatment of shareholders, enhance responsibility of board and norms for preventing insider trading. To summarize, corporate governance in India is essentially working towards improving transparency and accountability, disciplining dominant shareholders and safeguarding the interest of minority investors.[9]

Securities Law: SEBI

In ancient times, most matters relating to the rights of shareholders were governed by the company law. Since past some years, in few countries, the duty for safety of investors has changed to the securities law and the securities regulators in case of large listed companies. In India, the securities and Exchange Board of India (SEBI) was enacted to take number of initiatives to protect investors and as a statutory authority in 1992[10]. SEBI has also tackled the dominant shareholder's pricing rule that it has imposed on preferential allotments.

As mentioned earlier, the company law itself provides certain standards of information disclosure both in prospectuses and in annual accounts.[11] SEBI has included substantially to these needs in an attempt to make such documents more useful or meaningful. Some of these disclosures are very vital in the context of dealing with the dominant shareholder.

One of the most important things are the information on the performance of other companies in the same group, especially to those companies which have accessed the capital markets in the recent past. Such information makes investors to make a judgment about the earlier conduct of the dominant shareholder and factor that into any future dealings with him.[12] Company law itself says that new issue of shares must be rights issues to existing shareholders unless the shareholders in general meeting allow the company to issue shares to the general public or to other parties.[13]

Corporate Governance In SCRA

Another aspect of the SEBI is that in most public issues, the promoters are supposed to take a minimum stake of approximately 20% in the capital of the company[14] and to gainsuch shares for a minimum lock-in period of approximately three years as per the provisions of The Securities Contracts (Regulation) Act, 1956 (SCRA).[15] Furthermore, it also says that any stock exchange, which is in need of being recognized, may make an application in the said manner to the central Government.

Securities Contracts (Regulation) Amendment Act, 2007 has been enacted in order to amend the Securities Contracts (Regulation) Act, 1956, with aim of adding the securitization instruments. Under the definition of 'securities' and givethedisclosure-based regulation for issue of the securitized instruments and the procedure thereof.[16] This has been completed keeping in view that there isa considerable capacity in the securities market for the certificates or instruments under securitization transactions.[17]

Corporate Governance With Regards To ICDR

The Issue of Capital and Disclosure Requirements Regulations (ICDR) 2009, were issued by SEBI to reinforce the Corporate Governance framework in the Capital Market. These ICDR regulations, 2009 replaced the earlier guidelines of SEBI regarding preferential allotment.[18]

The 2009 Regulations very aptly described the issues that regulatory have to come across while dealing with exploitation done by the dominant Shareholders in governance. But sometimes it is for the benefit of the entire company and not just dominant shareholders to do certain things which are prohibited by the regulations. For instance, issuance of equity shares at a price that is lower than the six-month average price may be beneficial to the company but is prohibited by the regulations.

In a situation in which private placement of equity is done to investors at an arm's length, there a compromise of price can be considered. The method of private placement can be employed for any reason like cost avoidance etc, but it is not unknown that when a large chunk of equity is issued then it needs to be priced below the market price. So, the prohibition on preferential issue of shares on discount would eliminate the private placement entirely, also simultaneously the public issue might not be a feasible option due to cost.

Thus, the prohibition by the regulatory might have had an ultimate result of disabling many companies from issuing share capital altogether. An exception to the arm's length transactions in this regard might ease the situation a bit but can it be an absolute solution?

For the purpose of clause 49 of the Listing Agreement, the Chief Executive Officer and the Chief Financial Officer of a listed company have to certify that they have reviewed all the financial statements and other important documents. They have to give a declaration regarding the correctness and fairness of the statements and other financial records and certify that these show the true picture of the entity and are made in accordance with the laws, regulations and applicable accounting standards. [19]

Further the requirement to synchronise Indian Accounting Standards with the International Financial Reporting standards is recognised by the Ministry of Corporate Affairs.

These ICDR Regulations have been amended from Time to time to cope with the changing dynamics of the society and corporate affairs.[20] However these amendments are not with regards to corporate governance but to the lock-in period and minimum promoters' contribution, which is not relevant per say to be described in detail here.

Ethical Practice Of Corporate Governance In Capital Market

As we already know that the concept of corporate governance includes three things:
  1. Transparency
  2. Disclosure
  3. Fair Play

So, when we talk about the ethical practice of corporate governance in capital market then it is very obvious to jot down that these three key elements of corporate governance must be present in order to ensure that the ethical practices are being carried out in any capital market. Further, as we move onto the key relevant elements of corporate governance, it can be seen that as long as we follow these elements in any business, the work remains ethical.

If there is transparency in the business, if relevant details are being disclosed at specific times and if everything goes along and accordance with the procedural and substantive aspects of the law (i.e., fair play is ensured) then everything is ethical in the business because no malpractices with these key elements being active can be committed.

The major question that arises here is that, how can unethical practices be carried out in a capital market structure?
The answer to this question is quite easy and, on the point, as suggested by many scholars. According to the understandings being developed in past few years i.e., from 2013, after the enforcement of Companies Act, 2013, the capital markets are subjected to a lot of criticism. The main functioning of the capital market is to form a part of a financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.

Now, these dealings in shares and bonds might have many malpractices. For example, dealing with shares to a subsidiary company on a lower rate than the actual face value or selling it to relatives in lower values. It can even involve practices like fraud where one sells his shares through some unfair means or sells one share to multiple people without proper documentations.

Further, the shareholders not getting proper information about the company and its functioning was a major drawback. If a shareholder doesn't know what's going on in the company, where their money is being used then they might lose their money or they may choose wrong people in the board to maintain the functioning of the company. Also, if the company does not disclose its financial positions time to time, then it might affect the decisions of investors and due to wrong or no financial disclosure, there was a huge risk of falling into loses.

But, as the corporate governance structure came into picture and companies started to practice it, a lot of these problems got solved. Proving that a company is ethically strong is such a big task in today's market to make name in the market. Therefore, if a company shows what's going on in the company, discloses financial standings on time and does not commit any fraud through fair play then shareholders can know what's going on in the company and can vote accordingly. Also, the investors (including public in general) can know the financial standing of the company in market and can invest accordingly.

Therefore, ethical practice of corporate governance in capital market is an essential practice.

Sustainable Development Goals and Corporate Governance in Capital Market.
Sustainability as a part of Corporate Governance deals with accountability, ethical values and transparency to ensure proper management and minimal risk and corruption. It is important for ascertaining the long-term performance of a company. However, the question remains, whether the laws governing corporations take into account the environment protection and the agenda of sustainable development goals. For many years law makers have been trying to line up social welfare and financial markets.

The tassel between the capital market allocating funds for short term, unsustainable use and the policy makers plan for long term sustainability and Environment Protection, human rights and climate change is quite evident. When we say, embed sustainable development in the capital market, what we mean is that capital markets must function in a way that financial developmental needs of the present are met without harming the capacity of future generations to meet their development needs.

The allocation of capital is an important factor, as misallocation can be a failure in achieving Sustainable Development in the sphere of capital market. Improper internalization of social and environmental cost is another failure that needs to be addressed. When this cost is not internalised in the P&L Statement, it becomes easy for the non-compliant companies to raise capital as compared to the companies that are compliant and incur this cost. Thus, encouraging neglect of environment protection.

Now, coming to the specific goals that can be achieved by aligning corporate governance in capital markets with sustainable development; SDG 8[21], by developing capital raising plans for accomplishing the SDGs and establishing integrated incentives aligned with long term sustainability, true economic growth can be achieved. Further, SDG 12[22], can be achieved as capital is an essential factor of production and capital market, an essential source of capital, thus corporate governance with emphasis on goal 12 will affect the production capacity of financial services and in turn the consumption, striving to make them sustainable.

Lastly, an improved and integrated Corporate Governance will lead to achievement of SDG 16[23], therein capable institutions and good governance. If law mandating the participants of a capital market supply chain to provide a report of sustainability compliance to the public at large is made, it will help build accountable and inclusive institutes. Thus, help in achieving goal 16.

This paper outlined a conceptual framework between corporate governance and capital market in India. what is required today is a moderate administrative system with solid moral set of principles for the key players in the administration of an organization. The formation of a board inside the company to govern corporate governance of shareholders will not be sufficient.

The issue of corporate governance maltreatments by the key prevailing investors can be settled exclusively by powers outside the company. There are two key factors for achieving the same, Firstly, the company law administration as well as the securities regulator and secondly, the capital market.

Disregarding the deficiencies in corporate governance, the Indian economy and its monetary business sectors have begun achieving noteworthy development rates lately and showed a higher degree of optimism. The reason for this growth can be that India is presently plainly and unequivocally dedicated to maintaining and quickly assisting the major monetary changes and the advancement began in the mid-nineties.

In particular, the Securities and Exchanges Board of India laid out as a piece of these changes, has a thorough administrative system to guarantee fairness, transparency and good practice, and the customary Bombay Stock Exchange has likewise improved really. The National Stock Exchange of India, additionally settled as a feature of the changes, it functions efficiently to now exchange among the largest number of exchanges the world, simply behind NASDAQ and NYSE. So, to conclude the way to better corporate governance in India definitely lies in a more proficient and dynamic capital market.

  1. The total number of listed companies in India above 6000 combinely on Bombay Stock Exchange and National Stock Exchange, having a market capitalisation of US $ billion 1,163.9. Source: World Federation of Exchanges.
  2. 1200 listed companies' forged accounts: Study, The Times of India
  4. D. Mc Barnet, Legal Creativity: Law, capital and legal avoidance, in Lawyers in a Postmodern World: Translation and Transgression, (Eds.) M. Cain and C. Harrington (1994) 73
  5. Desirable Corporate Governance: A Code,
  6. 1 N. Vital, Issues in Corporate Governance in India, Paper for publication in the 5th JRD Tata Memorial Lecture Series.
  7. For a discussion of India's balance of payments and the inherent dangers in excessive reliance on portfolio inflows, see Bimal Jalan, note 12, at pp. 124´┐Ż7.
  8. Dilip Kumar Sen, Clause 49 of the Listing Agreement on Corporate Governance. p806-811.pdf.
  9. Puneeta Goel, Implications of corporate governance on financial performance: an analytical review of governance and social reporting reforms in India, 3 Asian Journal of Sustainability and Social Responsibility (2018),
  12. Section 81 of the Companies Act, 1956 deals with the preemptory right of the existing shareholders to buy the shares of the company, in cases of further issue of capital of the company.
  18. Regulation 76
  19. visited on 16th April 2022
  20. Arora Abhiraj, SEBI's ICDR Amendment: A Welcome change (but some additional clarifications would be welcome too!), Mondaq, 03 December 2021,
  21. Decent Work and Economic Growth
  22. Sustainable Production and Consumption
  23. Peace, Justice and Strong Institutions

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