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 stock market grew in popularity, a number of unethical practices started to
appear, including price manipulation, unauthorized private placements, failure to comply with the
Companies Act's requirements, insider trading, breaking stock exchange rules and regulations, delaying
the delivery of shares, among many other practices.
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. The Securities and Exchange Board of India (SEBI) was founded not long after that, in
1988.

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.

Since its establishment in 1992, the SEBI has undertaken a variety of initiatives, formed a number of
committees, and amended Clauses 35B and 49 of the listing agreement in an effort to improve corporate
governance. Here, the listing agreement's Article 35B and Clause 49 include rules and requirements that
highlight the SEBI's involvement in corporate governance. SEBI standards and recommendations for
good corporate governance under Clauses 35B and 49 of the listing agreement: Since its founding, SEBI
has made steps to bring Indian corporate governance procedures into line with the international norms
followed by mature nations. Governance is now more effective and strict in defending the interest
thanks to the most recent changes to Clauses 35B and 49 of the listing agreement.

The listing agreement's latest revisions to Clauses 35B and 49 make Governance more effective and
strict in defending the interests of all stakeholders. The revised Listing Agreement Clause 49 complies
with the 2013 Companies Act. This condition is applied to listed firms however as per SEBI
clarification, in future this clause will be applicable to non-listing companies as well.
SEBI has made it mandatory for listed companies to comply with corporate governance norms, such as
having a certain number of independent directors on their board, having an audit committee, and
publishing quarterly results. These regulations have helped to improve the transparency and
accountability of listed companies in India.
SEBI has also played a role in improving the accountability of companies by requiring them to disclose
certain information to the public. For example, SEBI has mandated that listed companies disclose their
financial statements, related party transactions, and other material information that may impact the
company's financial performance.
Another way in which SEBI has impacted corporate governance in India is by taking action against
companies that violate its regulations. 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.
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.

Under the leadership of Kumar Mangalam Birla, SEBI (Securities and Exchange Board of India) created
a committee on corporate governance in India to improve efficient corporate governance in the country
and recognize the need for it.

According to the recommendations made by this committee, SEBI has developed specific guidelines for
corporate governance and auditing in India. It is anticipated that these rules will be included in the listing
agreement between the company and the stock exchange.

(a) Board of directors:

Here are a few things to consider in this regard:

● The ideal ratio of executive and non-executive directors must be present on the board of directors
of the firm.

● Whether the Chairman is an executive or non-executive, the number of independent directors will
vary.

(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 consist of at least three non-executive directors, the majority of whom must be
independent, and at least one of whom must have knowledge of finance and accounting.
○ Its chairman must be an independent director, and he or she must be present at the annual
general meeting to answer shareholders' queries.

● An independent audit committee must be established by the corporation, and it must have the
following qualifications:
○ It must have at least three members, all of whom must be non-executive directors, the
majority of whom must be independent, and at least one of whom must have knowledge
of finance and accounting.
 ○ A director who is independent will serve as the committee's chairman. The Chairman will
take questions from shareholders during the Annual General Meeting.

● 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 following information on director compensation is included in the Annual Report's section on
corporate governance:
○ All elements of the compensation plans for managers, such as salaries, perks, bonuses,
stock options, pensions, etc.
○ Descriptions of fixed components, results-related benefits, and performance standards.

(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 SEBI is a relatively new organization, it has done a decent job of carrying out its mandate as a
capital market regulator, guaranteeing the protection of diverse stakeholders, and increasing participation
in capital formation. To maintain ethical trading and investor safety, SEBI has taken action where
warranted. A corporation that uses good corporate governance has much better levels of confidence
among its shareholders. Active and independent directors have a positive impact on share prices by
working to enhance the company's standing in the financial community.

Corporate governance is a crucial consideration for foreign institutional investors when choosing a
company to invest in. In order to correctly balance legislative and regulatory reforms for the growth of the
business and to encourage foreign investment, SEBI suggested amending Article 49. By enhancing
shareholder participation in decision-making and introducing transparency in corporate governance, the
laws and regulations serve to defend the interests of both society and shareholders. By safeguarding not
just the management's interests but also those of the stakeholders, corporate governance helps India's
economy grow in the expanding economies of the rest of the globe.

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