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Halfway right

Sebi’s effort to tighten norms for corporate governance does not go far enough

Sebi announced a batch of reforms of the corporate governance framework, which will come into effect from October 1. (PTI)
Sebi announced a batch of reforms of the corporate governance framework, which will come into effect from October 1. (PTI)

Sebi’s effort to tighten norms for corporate governance does not go far enough

SEBI has issued new regulations on corporate governance. While some of these are welcome, others are questionable. Further, the regulation-making process in Sebi does not appear to have undergone any change, as it should have, following the governance enhancing principles Sebi has signed up to in the Financial Stability and Development Council.

There is a long tradition of abusing the interests of public shareholders in India when individual entrepreneurs, business families or the government promote companies. There has been a two-pronged movement on strengthening the rules: one from the department of company affairs and another from Sebi. On February 13, Sebi announced a batch of reforms of the corporate governance framework, which will come into effect from October 1. Many of the proposed changes are on the right track.

These include a separate meeting of independent directors, the establishment of a whistle blower mechanism, and greater scrutiny and disclosure of related-party transactions. For the biggest companies of India, these are likely to increase the confidence of shareholders and thereby make possible increased financing from the public. Honest and ethical companies will find it easy to meet these requirements. Crooked companies will find that life is now more difficult for them — which is a good thing.

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But the Sebi announcement also includes some dubious proposals. For instance, Sebi now requires that every company have at least one woman director. There is no link between the empowerment of women and Sebi’s objectives (of consumer protection and micro-prudential regulation). Once activism in favour of women’s rights is acceptable in economic policy, more problematic demands could follow. Another group of restrictions that call forth scepticism has to do with the number of boards independent directors can sit on and and their length of tenure. Precise numbers are being prescribed by Sebi which cannot have a rational foundation. This raises the question of whether Sebi’s regulation-making process has changed at all. Under the handbook on adopting governance enhancing measures of the draft Indian Financial Code, every regulation must emanate from a formal process of proving a market failure, demonstrating that the stated intervention solves this failure. Sebi is a signatory to the handbook — as are all five financial agencies. Sebi needs to now follow this process while issuing new regulations about corporate governance, as it has committed itself to.