INDIAN INSTITUTE OF MANAGEMENT

ROHTAK

Legal Aspects of Business

Impact of SEBI in Corporate Governance

Submitted by Group 10

Mehul Pal IPM01112

Naman Banka IPM01114
Ojus Singhal PGP13163
Priyal Maheshwari PGP13177
Radhika Mukati PGP13182
Riya Sharma PGP13197

Introduction
The Securities and Exchange Board of India (SEBI) was created on April 12th, 1992. SEBI is an acronym
for this organisation. It is an organisation that is controlled and regulated by statute, and it is responsible
for the capital and securities markets in India.

The Securities and Exchange Board of India (SEBI) provides an assurance that it protects the interests of
investors by making certain that the norms and regulations are followed. It performs the function of a
watchdog, which is an unnamed entity that is responsible for managing the flows of the whole stock
market in the nation.

In India, the Securities and Exchange Board of India (SEBI) acts as the market regulator for the securities
industry. After first being established for the function of monitoring the operations, in May of 1992, the
Government of India bestowed onto SEBI the status of a legally recognised organisation.
During the tail end of the 1970s, India's capital market began to gain popularity as a hot new trend in the
country. Despite this, as the market for stocks became more popular, a number of unethical practises
began to emerge, including price manipulation, unofficial private placements, non-compliance with the
provisions of the Companies Act, insider trading, violation of rules and regulations governing stock
exchanges, delay in making delivery of shares, and a great number of other practises.
As time went on, the government of India came to the conclusion that it was necessary to create an
authority in order to curb these unethical business practises and to regulate the functioning of the Indian
securities market. This was due to the fact that the majority of Indian people had begun to lose faith in the
stock market.
Almost immediately after that, in the year 1988, the Securities and Exchange Board of India (SEBI) was
established.

At the beginning, SEBI was only able to perform the role of a watchdog since it lacked the power
necessary to oversee and regulate the activities of the Indian capital market. Despite this, in 1992, it was
granted statutory standing, at which point it evolved into an independent organisation with the
responsibility of overseeing the operations of the country's whole stock market. The SEBI was given the
legal authority to engage in the following endeavours by virtue of its statutory status:

The Securities and Exchange Board of India (SEBI) was given the authority to both regulate and approve
the by laws of stock exchanges. It is possible for you to examine the accounting records of the many stock
exchanges that are registered in the nation. In addition to this, it may need periodic returns from the stock
exchanges in question. The SEBI was given the authority to conduct audits of the books and records kept
by financial intermediaries. That might put corporations in a position where they are unable to be listed
on any stock market. In addition to this, it could be responsible for the registration of stockbrokers.

The Securities and Exchange Board of India (SEBI) has its headquarters in Mumbai, as well as regional
offices in New Delhi, Chennai, Kolkata, and Ahmedabad. In addition to these locations, the Securities
and Exchange Board of India (SEBI) has regional offices in Jaipur, Guwahati, Bangalore, Patna,
Bhubaneswar, Chandigarh, and Kochi.
There are now 17 stock exchanges active in India, two of which being the National Stock Exchange
(NSE) and the Bombay Stock Exchange (BSE). The Securities and Exchange Board of India (SEBI) is the
government agency that oversees the functioning of all of these stock exchanges.

Objective of SEBI

The Securities and Exchange Board of India (SEBI) is in charge of ensuring that India's stock market
operates in a well-organized manner. It is produced in order to safeguard the interests of traders and
investors in the Indian stock market by establishing a healthy atmosphere in the securities market. Also, it
is made in order to encourage the growth of the equities market and to regulate it.

In addition, as was mentioned before, one of the primary motivations behind the formation of SEBI was
the elimination of unethical business practises in the Indian stock market.

Role of SEBI

1. Protecting the interest of investors : Investors are protected by SEBI against deceptive and
misleading advertising, which is one of SEBI's primary responsibilities. In retaliation, SEBI has
created standards to guarantee that advertisements are truthful and succinct, as well as to
safeguard the interests of those who invest. Controlling the manipulation of prices: A practise
known as "price rigging" refers to the manipulation of prices via the use of price fluctuations with
the intention of artificially increasing or deflating the market price of a security. SEBI makes an
attempt to educate investors so that they are able to choose the securities that will provide them
with the greatest return on their investment when comparing the offers of various firms. For the
purpose of conducting investigations into allegations of fraud and insider trading, SEBI has
published guidelines. Included in this are the provisions for a fine as well as possible
imprisonment.

2. To ensure Development activities in Stock Exchange: E-Trading: The idea of e-trading was
first presented a few years ago by SEBI in order to get rid of the uncomfortable feeling. The
procedure of purchasing and selling securities is made easier as a result of this. The stock
exchange is the venue for the initial public offering of securities on the Primary Market, which is
a component of the Capital Market. In order to ensure that the securities market operates
efficiently, SEBI encourages the education and training of market intermediaries.

3. To Regulate Insider Trading: From the beginning of markets that deal with the buying and
selling of securities, stock exchanges, and other financial instruments, there has been an issue
with insider trading. A person or group of persons who have first-hand knowledge of the internal
challenges and highs and lows of a corporation is referred to as having "insider" information. The
insider's shares are promptly sold when they become aware of the loss that is likely to be
sustained, which happens as soon as the insider receives this information. As a result, the
corporation sustains a significant amount of loss.

Role of SEBI in corporate governance

SEBI has been given the mandate to protect the interests of investors in securities and to promote the
 development and regulation of the securities market in India. One of the ways in which SEBI has
impacted corporate governance in India is by making regulations and guidelines for listed companies.

In an effort to enhance corporate governance, the SEBI has launched several initiatives since its
founding in 1992, established a number of committees, and modified Clauses 35B and 49 of the listing
agreement. Here, Article 35B and Clause 49 of the listing agreement contain guidelines and obligations
that emphasize the SEBI's engagement in corporate governance. In accordance with Clauses 35B and 49
of the listing agreement, SEBI guidelines and requirements for good corporate governance are: Since its
inception, SEBI has taken action to align Indian corporate governance practices with the standards set
by other developed nations. According to the most recent amendments to Clauses 35B and 49 of the
listing agreement, governance is now more severe and effective in safeguarding the interest..

With the most recent amendments to Clauses 35B and 49 of the Listing Agreement, Governance is now
more stringent and effective in protecting the interests of all stakeholders. The updated Clause 49 of the
Listing Agreement conforms with the 2013 Companies Act. According to a SEBI clarification, going
forward, non-listing businesses would also be subject to this provision, which now only applies to listed
corporations.
Corporate governance standards, such as having a specific number of independent directors on their
board, an audit committee, and disclosing quarterly results, have been made required by SEBI for listed
businesses. These rules have assisted in enhancing the accountability and transparency of listed firms in
India.

By compelling corporations to disclose some information to the public, SEBI has also contributed to
enhancing corporate responsibility. For instance, SEBI requires listed businesses to report their financial
statements, related party transactions, and other important information that might affect their financial
performance.
By prosecuting businesses that break its rules, SEBI has also had an influence on corporate governance
in India. Companies that break its rules might face fines and penalties from SEBI, and in severe
situations, it may even prevent them from accessing the securities market.

Overall, SEBI has had a significant impact on corporate governance in India by improving transparency,
accountability, and promoting good governance practices among listed companies. Its regulations and
guidelines have helped to protect the interests of investors and ensure that listed companies operate in a
responsible and ethical manner.

SEBI guidelines for corporate governance

Corporate governance refers to the processes, laws, and customs that regulate how businesses are run
and managed. It strives to lessen shareholder conflicts of interest and advance moral decision-making,
openness, and integrity at the executive level. In terms of corporate governance, SEBI's job is to make
sure that all parties adhere to and apply these standards.
For instance, the group makes sure that businesses that issue securities follow ethical standards and
communicate pertinent information to shareholders. It also controls takeovers, stock market listing
agreements, company reorganizations, and other things. The SEBI principles for corporate governance are
intended to give investors a secure, open environment and to outlaw dishonest or unfair actions like
insider trading.

2018 saw SEBI enforce greater compliance requirements, which increased the organization's significance
in upholding ethical standards among firms. For instance, large companies will be obliged to have
separate chairpersons and CEOs as well as at least one independent women director. A certain number of
annual general meetings must also be held, and related-party transactions must be disclosed by listed
businesses. The Kotak committee's recommendations from March 2018 served as the foundation for
many of SEBI's corporate governance efforts, which seek to increase transparency.

A committee on corporate governance in India was established by SEBI (Securities and Exchange Board
of India) under the presidency of Kumar Mangalam Birla in order to realize the need for corporate
governance and advance effective corporate governance in India.

Based on the suggestions of this committee, SEBI has published particular rules for auditing and
corporate governance in India. These guidelines are anticipated to be integrated into the listing agreement
between the firm and the stock market.

(a) Board of directors:

Here are a few things to consider in this regard:

● The number of independent directors will vary depending on whether the Chairman is an
executive or non-executive
● The board of directors of the company must have the proper mix of executive and non-executive
directors.

(b) Audit Committee:

Here are some things to consider in this regard:

● The organization is required to establish an independent audit committee with the following
bylaws:

○ It must have a minimum of three non-executive directors, at least one of whom must be
financially and/or accounting-savvy, and the majority of whom must be independent.
○ The chairman should be an independent director and shall be available to the
shareholders for questions at the annual general meeting.

● An independent audit committee must be established by the corporation, and it must have the
following qualifications:
● It must consist of a minimum of three non-executive directors, the majority of whom must be
independent, at least one of whom must be knowledgeable in finance, and all of whom must be
non-executive directors.
 ● The Chairman of the Committee will be an Independent Director at the Annual General Meeting,
questions from shareholders will be answered by the Chairman.

The following duties should be assigned to the audit committee:

○ Monitoring the company's financial reporting procedure and the dissemination of its
financial reports to guarantee the accuracy, sufficiency, and dependability of the financial
statements.
○ Seeking the appointment and removal of an external auditor.
○ Evaluating the effectiveness of internal audit's job.
○ Modernizing the business's risk and financial management procedures. electronic version

(c) Remuneration of Directors

The section on corporate governance in the Annual Report contains the following information on director
compensation:
 Any component of a manager's pay package, including wages, benefits, bonuses, stock options,
pensions, etc.
 Details on fixed elements, perks connected to outcomes, and performance benchmarks.

(d) Process of the Board Some of the points set out in this Regard are: : There should be a section in
the annual report dedicated to a Management Discussion and Assessment Report, which covers the
following ground: (within limits defined by its competitive position).
The Potential Dangers and Benefits

● Segment or product-specific results

● Threats and Challenges
● Analysis of operational performance as it relates to financial outcomes.
● The cutting edge of quantitative development in HR and IR.

(e) Administration:

A Management Discussion and Appraisal Report should form part of the shareholders’ annual report,
including discussions on the following topics (within limits defined by its competitive position).

 Risks and opportunities

 Segment-wise or product-wise performance
 Risks and Issues
 Discussion on financial results concerning the performance of operation.
 Front of material growth in human resource / industrial relations.

(f) Shareholders:

The following are a few considerations in this regard:

The following information must be communicated to stockholders in the case of a new director's
appointment or a director's reappointment:

● A Board Committee shall be formed under the chairmanship of a non-executive director to

explicitly examine the redress of shareholder and investor complaints.
● A brief resume of the director (summary).
● The nature of his specialist knowledge.
● The number of organisations over which he retains management and membership of the Board's
committees.

(g) Corporate Governance report:

In the annual report of the company, there will be a part devoted specifically to auditing as well as
corporate governance. It will be in the form of an in-depth report on the governance of the corporation.

(h) Compliance:

The firm is required to get a certificate from the company auditors stating that it complies with the
auditing and corporate governance requirements set out in the certificate. This certificate is to be
appropriated and included in the Directors' Report that is sent to investors. It is also to be delivered to the
stock market.

Issues and Challenges faced by SEBI in corporate governance

While SEBI has made significant progress in promoting good corporate governance practices in India,
there are still some challenges that it faces in this regard. Some of the key issues faced by SEBI in
corporate governance include:

Lack of Compliance: One of the major challenges faced by SEBI is the lack of compliance with its
regulations by some listed companies. While SEBI has made it mandatory for listed companies to comply
with its regulations, there are still some companies that do not follow them. This can lead to a lack of
transparency and accountability, and can harm the interests of investors.

Insider Trading: Insider trading is another major issue that SEBI faces in corporate governance. Insider
trading refers to the buying or selling of securities by a person who has access to non-public information
about a company. This can lead to unfair trading practices and can harm the interests of investors. SEBI
has taken several steps to prevent insider trading, but it remains a challenge.

Related Party Transactions: Related party transactions are another area of concern in corporate
governance. Related party transactions refer to transactions between a company and its related parties,
such as directors or promoters. These transactions can be prone to conflict of interest and can harm the
interests of minority shareholders. SEBI has made it mandatory for companies to disclose related party
transactions, but there are still some challenges in monitoring and regulating these transactions.
Corporate Culture: The overall corporate culture in India is another challenge that SEBI faces in
promoting good corporate governance practices. Many companies still have a hierarchical and
authoritarian culture, which can lead to poor decision-making and a lack of accountability. SEBI has
taken several steps to promote a culture of good governance, but changing corporate culture is a long-
term challenge.

Enforcement: Enforcement of regulations is another challenge faced by SEBI in corporate governance.

SEBI has the power to impose fines and penalties on companies that violate its regulations, and in
extreme cases, it can even bar companies from accessing the securities market. However, enforcement of
regulations can be a challenging task, especially when dealing with large and powerful companies.

Globalization: The increasing globalization of the Indian economy is another challenge that SEBI faces
in corporate governance. As Indian companies expand globally, they need to comply with global
standards of corporate governance. SEBI needs to ensure that Indian companies maintain high standards
of governance while also remaining competitive in the global marketplace.

In conclusion, while SEBI has made significant progress in promoting good corporate governance
practices in India, there are still some challenges that it faces. These challenges require a multi-pronged
approach and a long-term commitment from all stakeholders to address.

Recommendations

SEBI can take several measures to combat the current challenges faced in corporate governance. Here are
some elaborations on the measures:

Strengthening Regulations: SEBI can strengthen its regulations related to corporate governance to
ensure that companies comply with them. For example, it can introduce stricter regulations related to
related-party transactions, disclosure requirements, and board composition. SEBI can also mandate
training for directors and senior management on corporate governance practices.

Promoting Transparency: SEBI can promote transparency by making it mandatory for companies to
disclose all related party transactions and providing regular updates to shareholders about their financial
performance. SEBI can also ensure that companies have a whistleblower policy in place to encourage
employees to report any violations.

Improving Enforcement Mechanisms: SEBI can improve its enforcement mechanisms by increasing its
surveillance and monitoring of listed companies. It can also introduce stricter penalties for violations of
its regulations. SEBI can also work towards streamlining the process of enforcement and providing clarity
on the penalty structure.

Building Awareness: SEBI can work towards building awareness among investors about the importance
of good corporate governance practices. SEBI can hold investor awareness programs, workshops, and
seminars to educate investors on how to make informed investment decisions.
Capacity Building: SEBI can build the capacity of its own staff to handle the increasing complexity of
corporate governance issues. It can also work with other regulatory bodies and industry associations to
build a network of experts who can provide guidance to companies.

Collaboration: SEBI can collaborate with other stakeholders such as auditors, credit rating agencies, and
independent directors to improve the overall corporate governance framework in India. SEBI can also
work with international bodies to learn from best practices in other jurisdictions.

Focus on Technology: SEBI can leverage technology to monitor corporate governance practices in a
more efficient manner. For example, it can use data analytics to identify potential violations or use
blockchain technology to improve transparency and accountability.

In conclusion, to combat the current challenges faced by SEBI in corporate governance, it will require a
multi-pronged approach that involves strengthening regulations, promoting transparency, improving
enforcement mechanisms, building awareness, capacity building, collaboration, and focusing on
technology. By taking these measures, SEBI can promote good corporate governance practices among
listed companies in India.

Conclusion

Although being a young organization, SEBI has done a respectable job of upholding its obligations as a
capital market regulator, ensuring the safety of various stakeholders, and boosting participation in capital
formation. If necessary, SEBI has taken measures to protect ethical trading and investor safety. A
company with sound corporate governance enjoys substantially higher levels of shareholder confidence.
By trying to improve the company's reputation in the financial world, active and independent directors
have a favorable effect on share prices.

When selecting a firm to invest in, international institutional investors must take corporate governance
into account. SEBI proposed changing Article 49 in order to properly balance legislative and regulatory
changes for the expansion of the company and to promote foreign investment. The rules and regulations
serve to protect the interests of society and shareholders by boosting shareholder engagement in decision-
making and introducing transparency in corporate governance. Corporate governance promotes India's
economy's expansion with the rest of the world's expanding economies by protecting not just the
management's interests but also that of the stakeholders.

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