CORPORATE GOVERNANCE AND FINANCE

THE ROLE OF SEBI IN CORPORATE GOVERNANCE: WITH THE HELP OF

JUDICIAL PRONOUNCEMENTS

HIMACHAL PRADESH NATIONAL LAW UNIVERSITY

ASSIGNMENT OF

“THE ROLE OF SEBI IN CORPORATE GOVERNANCE: WITH THE HELP OF

JUDICIAL PRONOUNCEMENTS”

SUBMITTED BY: COURSE IN-

CHARGE DRISHTI
YADAV DR. ALOK KUMAR & MR. PRAVEEN KUMAR

1020161712. ASSISTANT PROFESSORS OF

LAW

B.A. LL.B. (HONS.)

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THE ROLE OF SEBI IN CORPORATE GOVERNANCE: WITH THE HELP OF
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ACKNOWLEDGEMENT

Every project big or small is successful largely due to the effort of a number of wonderful
people who have always given their valuable advice or lent a helping hand. I sincerely
appreciate the inspiration; support and guidance of all those people who have been
instrumental in making this project a success.

I, Drishti Yadav, the student of H.P. National Law University (Shimla), am extremely
grateful to H.P. National Law University (Shimla) for the confidence bestowed in me and
entrusting my assignment of Corporate Governance and Finance.

At this juncture I feel deeply honored in expressing my sincere thanks to Honorable.

REGISTRAR Prof. S.S. Jaswal and Honorable VICE CHANCELLOR Prof.(Dr.) Nishtha
Jaswal for making resources available at right time and providing valuable insight leading to
the successful completion of my assignment.

I also extend my gratitude to my Project Guide Dr. Alok Kumar & Mr. Praveen Kumar,
Assistant Professors of Law, who assisted me in compiling the project.

I would also like to thank all the faculty members of H.P. National Law University (Shimla)
for their critical advice and guidance without which this project would not have been
possible.

Last but not the least I place a deep sense of gratitude to my family members and my friends
who have been constant source of inspiration during the preparation of this project work.

DATE –JUNE 26, 2020 NAME – D RISHTI

YADAV

1020161712

B.A. LL.B. (HONS.)

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ABBREVIATIONS USED

1. HC HIGH COURT

2. SC SUPREME COURT

3. AIR ALL INDIA REPORTER

4. Anr. ANOTHER

5. ART. ARTICLE

6. COMM. COMMITTEE

7. COMMR. COMMISSIONER

8. Ltd. LIMITED

9. Govt. GOVERNMENT

10. Ed. EDITION

11. SCC SUPREME COURT CASES

AUTHORITIES USED

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● SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992

TABLE OF CONTENTS

Abbreviations Used……………………………………………………………………………3

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Important Definitions Under Protection of Plant Varieties and Farmer’s Rights Act of 20014

1.Brief Introduction To The Topic…………………………………………………………....8

2.Literature review……………………………………………………………………….......10

3.Statement of Problem………………………………………………………………………12

4.Object of the Study…………………………………………………………………………13

5.Hypotheses…………………………………………………………………………………13

6.Significance of the study…………………………………………………………………...14

7.Research Methodology……………………………………………………………………..15

8.Sources……………………………………………………………………………………..15

9.An Overview with the help of Agreements and Conventions……………………………..15

10.Institutions and Conventions Responsible for the Reconstruction of Farmers…………...19

11.The International union for protection of new plant varieties of plants (UPOV) imbalanced

provisions…………………………………………………………………………………….20

12.Need for Protection of plant varieties and Farmers Act, 2001 in India…………………..22

13.Registration……………………………………………………………………………….26

14.Conclusion and Analyses…………………………………………………………………27

15.References………………………………………………………………………………...28

1. BRIEF INTRODUCTION TO THE TOPIC

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The SEBI is a regulatory authority in India established under Section 3 of SEBI Act to protect
the interests of the investors in securities and to promote the development of, and to regulate,
the securities market and for matters connected therewith and incidental thereto. The
securities market started emerging as a new sensation in India during the end of the 1970s.
However, with the popularity of stocks, a number of malpractices also started rising like price
rigging, unofficial private placements, non-compliance with the provisions of the Companies
Act, insider trading, violation of stock exchange rules and regulations, delay in making
delivery of shares and many others. As this time, the Indian Government realized the need for
establishing an authority to reduce these malpractices and regulate the working of the Indian
securities market as the majority of Indian People started losing their trust in the stock
market. Soon after, SEBI was set up in the year 1988. Initially, SEBI acted as a watchdog and
lacked the authority of controlling and regulating the affairs of the Indian capital market.
Nonetheless, in the year 1992, it got the statutory status and became an autonomous body to
control the activities of the entire stock market of the country. The main objective of SEBI is
to ensure that the securities market in India functions in an orderly manner. It is made to
protect the interests of investors and traders in the Indian stock market by providing a healthy
environment in securities and to promote the development of, and to regulate the equity
market. one of the prime reasons for establishing SEBI was to prevent malpractices in the
Indian capital market. Since its inception, SEBI has grown steadfastly. Its gradual growth can
be analyzed through 3 scams- Harshad Mehta Securities Fraud, Satyam Scandal and
Sahara Scam.

2. LITERATURE REVIEW

(Singh. 2010) The researcher has found out that there are sufficient rules and regulations in
the law but there is a problem of implementation of those rules and regulations, Researcher

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has also suggested that there should be a continuous review of an independent regulator, He
has also noticed that the auditor and audit committee should work hand on hand to enhance
the consistency factor of accounting documents. He has also examined that the Satyam was
just a loophole rather than the rule. (Singhal 2012) The researcher has investigated the
importance of Corporate governance for the new developments in a worldwide viewpoint.
They have also compared major issues of PSU in India, there performances and responsibility
with the public sector in India. Managerial autonomy, board structure, roles undertaken by
nonexecutive directors and compliance with SEBI policies for planning and executions.
Rujitha T R (2012), Researcher has found that the objective of the audit committee has to be
continued to include the mistake of risk management control systems to create an
environment for the obedience to the practices of good corporate governance. Since the audit
committee plays a very important role in corporate governance so continuous monitoring is
required. The role of audit committee gains more prominence as there is a growing concern
about the quality of financial statements for the protection of stakeholders interest. To ensure
the effective implementation and compliance of standards of corporate governance by SEBI
rules and regulations is a need of an hour at the ground level. (Qazi. 2017) Researcher has
found that the transparent and effective Corporate governance has played by SEBI. It To
improve the transparency and integrity of the Market it has constituted several committees.
Major amendments are made under the listing Agreement clause 49 that includes Shareholder
right, provisions regarding independent Directors, related party transactions, Disclosure and
transparency. He found that India has a really best law but the problem is how the corporate
is going to monitor and implement these new laws to improve the Corporate Governance.

3. STATEMENT OF PROBLEM

Corporate Governance has gained momentum across the world due to corporate failures,
unethical business practices and insufficient disclosure etc. Effective Corporate Governance
depends upon two factors. Transparency in the business operations and the second are the
legal and regulatory framework created by the Government. There is a gap between precept

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and practice of Corporate Governance. The topic of Corporate Governance has gained
prominence since the 1980‘s and more so after the code of corporate governance issued by
the Cadbury committee. In line with the Cadbury committee, the Kumar-mangalam Birla
Committee has also issued a code of corporate governance for companies in India. According
to the Kumara mangalam Birla Committee, “Corporate governance is the system by which
companies are directed and controlled. Boards of directors are responsible for the governance
of their companies. The shareholders‘ role in governance is to appoint the directors and the
auditors and to satisfy themselves that an appropriate governance structure is in place. The
responsibilities of the board include setting the company‘s strategic aims, providing the
leadership to put them into effect, supervising the management of the business and reporting
to shareholders on their stewardship. The board‘s actions are subject to laws, regulations and
the shareholders in general meeting”. The governance structure of a country protects the
investors from expropriation by managers and large shareholders. In different jurisdictions,
rules protecting investors come from different sources, including company, security,
bankruptcy, takeover, and competition laws, and also from stock exchange regulations and
accounting standards. Hence it becomes both important and difficult to analyse the role
played by judiciary and legislature in regulating and harmonising the role of SEBI in
corporate governance.

4. OBJECT OF THE STUDY

In the aftermath of corporate scandals and scams leading to collapse of corporate entities in
turn financial system of the nation due to bad governance, the need for good corporate
governance was felt. Today there is greater need for the observance of standards of
governance for protecting and safeguarding the interest of stakeholders across the world and

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India is not an exception. Corporate governance is felt as an important mechanism for
sustainable business practices than ever before in the corporate management history.

All the stakeholders of company -shareholders, board of directors, Management, employees,

investors, consumers, regulators and suppliers have rights as well as responsibilities in
making the companies to comply with the corporate governance and thereby reducing the
corporate scams, scandals, crimes in the economy. Corporate governance legal framework
plays a pivotal role in this endeavor. In India, SEBI established in 1992 as a regulator and
watch dog has a pivotal role and responsibility in enforcing corporate governance practices
on corporate entities. Hence this assignment basically focus on two main and important
objects:

1. To study and analyse the role of SEBI in Corporate Governance.

2. To study and analyse the role of judiciary and the legislature in SEBI and Corporate
Governance.

5. HYPOTHESES

SEBI has power to investigate circumstances where market or its players have been harmed
and can enforce govern standards with directives. An appeal process in place ensures
accountability and transparency. SEBI may terminate from the securities list any company
that does not comply with its governance standards and regulation. Main aim of its
origin was to curb the malpractices such as Lack of transparency in the trading operations and
prices charged to clients, Poor services due to delay in passing contract notes or not
passing contract notes, Delay in making payments to clients or in giving delivery of shares,
Persistence of odd lots and refusal of companies to stop this practice of allotting shares
in odd lots, Insider trading by agents of companies or brokers rigging and
manipulating prices, unofficial premium on new issue, violation of rules and regulations of
stock exchange and listing requirements. Due to these malpractices the customers started
losing confidence and faith in stock exchange. Many high profile corporate
governance failure scams like the stock market scam, the UTI scam, Ketan Parikh scam,
Satyam scam, which was severely criticized by the shareholders, called for a need to make
corporate governance in India transparent as it greatly affects the development of the

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country. Effective corporate governance is only key to regain the trust of investors and
safeguard their interest. This paper aims to study the role of SEBI in corporate
governance and maintenance. Hence following hypothesis are formed which are given below:

1. It is undoubtedly true that SEBI was formed in order to play an effective role in
Corporate Governance but the role played by SEBI is effective or not.
2. The impact of various scams on the growth of SEBI had led to its better functioning
of Corporate Governance.

6. RESEARCH METHODOLOGY

The methodology adopted by the researcher is purely doctrinal in nature. It involved in depth
study of source materials, text review, case study and comparative study. The research is
based on two types of material i.e., primary materials and secondary materials. Primary
materials consist of the text of laws, declarations etc. on the issue. Secondary materials
consist of books, articles, encyclopedia, research papers, newspapers and magazines. The
research also includes study of case laws. Use of the internet was also made to gather
important information relating to the subject of study. The research is analytical and
descriptive in nature.

7. SOURCES

Secondary sources of information have been utilized in the writing of this research.

8. SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

The SEBI is a regulatory authority in India established under Section 3 of SEBI Act to protect
the interests of the investors in securities and to promote the development of, and to regulate,
the securities market and for matters connected therewith and incidental thereto.1 The
securities market started emerging as a new sensation in India during the end of the 1970s.
However, with the popularity of stocks, a number of malpractices also started rising like price
rigging, unofficial private placements, non-compliance with the provisions of the Companies

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Act, insider trading, violation of stock exchange rules and regulations, delay in making
delivery of shares and many others. As this time, the Indian Government realized the need for
establishing an authority to reduce these malpractices and regulate the working of the Indian
securities market as the majority of Indian People started losing their trust in the stock
market.1 Soon after, SEBI was set up in the year 1988. Initially, SEBI acted as a watchdog
and lacked the authority of controlling and regulating the affairs of the Indian capital market.
Nonetheless, in the year 1992, it got the statutory status and became an autonomous body to
control the activities of the entire stock market of the country. The main objective of SEBI is
to ensure that the securities market in India functions in an orderly manner. It is made to
protect the interests of investors and traders in the Indian stock market by providing a healthy
environment in securities and to promote the development of, and to regulate the equity
market. one of the prime reasons for establishing SEBI was to prevent malpractices in the
Indian capital market. The stock market is one of the most crucial indicators of a country’s
economic health. If people lose faith in the market, the number of participants will go down.
Furthermore, the country will also start losing FDIs and FIIs considerably which will
substantially hamper the country’s foreign exchange inflows. Before, SEBI was established
many scams and malpractices took place in the Indian stock market. One of the famous
Indian stock market scams was “Harshad Mehta scam.” After SEBI came into power, stock
market affairs started becoming healthier and more transparent. Nonetheless, some securities
mark scams have taken place even after SEBI came into power. One famous such scam was
“Ketan Parekh scam” Although unfair activities do happen in the Indian capital market
even as of today, their frequency is quite less. Moreover, the security market statutes and
regulations are updated time and again. Therefore, day by day, SEBI is getting more and
more stringent with its authority.

9. CORPORATE GOVERNANCE

Corporate Governance is a set of customs, Policies and processes by which an Institution is

Governed. Corporate Governance deals with how a corporate is governed. It is all about
promoting corporate fairness, transparency and accountability. Corporate governance is the
manner in which companies or market systems operate, including the rules, regulations,
1
KHANNA, SRI RAM FINANCIAL MARKETS IN INDIA AND PROTECTION OF INVESTORS. VOICE (Voluntary
Organization in Interest of Consumer Education). (ed.) (2004). New Delhi: New Century Publications.

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policies and standards for accountability, transparency and general corporate integrity. A
corporation includes various stakeholders viz. investors, shareholders, customers, employees,
vendor partners, government and society. Its objective should not be confined to maximizing
the shareholder value but should be responsible to all stakeholders. Its governance should be
fair and transparent to its stakeholders in all its transactions. Thus, corporate governance
becomes imperative in today's globalized world where corporations need to access global
pools of capital, need to attract and retain the best human capital from various parts of the
world, need to partner with vendors on mega collaborations and need to live in harmony with
the community.2 On the other hand, the Liberalization and related developments such as
deregulation, privatization and extensive financial liberalization render the Corporate
Governance very crucial. All the fruits of capital market reforms can be lost to corporate
frauds, malpractices etc. Thus, Independent and effective corporate governance reforms are
necessary to maintain the market credibility confidence.

10. ROLE OF SEBI IN PROMOTING CORPORATE GOVERNANCE

The establishment of SEBI has also played a significant role in establishing norms for
corporate governance in India. Over the years, SEBI constituted two committees to make
recommendations relating to corporate governance in india, which were Kumar Manglam
Birla committee, which submitted its report in 2000 and the Narayana Murthy Committe,
which submitted its report in 2003. These committees made various important
recommendations. SEBI Major Recommendations were:

• Composition of Board

• Formation of Audit Committee

• Disclosure of relevant information to the shareholders

The recommendations of these committees form the foundation of the legal regime for
corporate governance in India. An improved corporate governance is the key objective of the
regulatory framework in the securities market3. Accordingly, Securities and Exchange Board
of India (SEBI) has made several efforts with a view to evaluate the adequacy of existing

2
ARORA, RAMESH K & TANJUL SAXENA, CORPORATE GOVERNANCE: ISSUES AND PERSPECTIVES (eds.) (2004).
3
BAJAJ, P. S. & RAJ AGARWAL, BUSINESS ETHICS: AN INDIAN PERSPECTIVE. (2004). New Delhi: Biztantra.

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corporate governance practices in the country and further improve these practices. It is
implementing and maintaining the standards of corporate governance through the use of its
legal and regulatory framework, namely:-

Securities Contracts (Regulation) Act, 1956

This Act was enacted to prevent undesirable transactions and to check speculation in the
securities by regulating the business of dealing therein. Any stock exchange, which is
desirous of being recognised, may make an application in the prescribed manner to the
Central Government. Every application shall contain such particulars as may be prescribed,
and shall be accompanied by a copy of the bye-laws of the stock exchange for the regulation
and control of contracts as well as a copy of the rules relating in general to the constitution of
the stock exchange, and in particular to; firstly, the governing body of such stock exchange,
its constitution and powers of management and the manner in which its business is to be
transacted;4 secondly, the powers and duties of the office bearers of the stock exchange;
thirdly, the admission into the stock exchange of various classes of members, the
qualifications for membership, and the exclusion, suspension, expulsion and re- admission of
members there from or there into; fourthly, the procedure for the registration of partnerships
as members of the stock exchange, in cases where the rules provide for such membership;
and the nomination and appointment of authorised representatives and clerks. Every
recognised stock exchange shall furnish the Central Government with a copy of the annual
report, and such annual report shall contain such particulars as may be prescribed. It may
make rules or amend any rules made by it to provide for all or any of the following matters,
namely:- (i) the restriction of voting rights to members only in respect of any matter placed
before the stock exchange at any meeting; (ii) the regulation of voting rights in respect of any
matter placed before the stock exchange at any meeting so that each member may be entitled
to have one vote only, irrespective of his share of the paid-up equity capital of the stock
exchange; (iii) the restriction on the right of a member to appoint another person as his proxy
to attend and vote at a meeting of the stock exchange; etc. If, in the opinion of the Central
Government, an emergency has arisen and for the purpose of meeting the emergency, the
Central Government considers it expedient so to do, it may, by notification in the Official
Gazette, for reasons to be set out therein, direct a recognised stock exchange to suspend such
of its business for such period not exceeding seven days and subject to such conditions as
4
ibid.

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may be specified in the notification, 5 and, if, in the opinion of the Central Government, the
interest of the trade or the public interest requires that the period should be extended, it may,
by like notification extend the given period from time to time. Securities Contracts
(Regulation) Amendment Act, 2007 has been enacted in order to further amend the Securities
Contracts (Regulation) Act, 1956, with a view to include securitisation instruments under the
definition of 'securities' and provide for disclosure based regulation for issue of the
securitised instruments and the procedure thereof.6

Securities and Exchange Board of India Act, 1992

This Act was enacted to protect the interests of investors in securities and to promote the
development of, and to regulate, the securities market and for matters connected therewith or
incidental thereto. For this purpose, the SEBI (the Board), by regulation, specify:- (i) the
matters relating to issue of capital, transfer of securities and other matters incidental thereto;
and (b) the manner in which such matters shall be disclosed by the companies. No stock-
broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to
an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other
intermediary who may be associated with securities market shall buy, sell or deal in securities
except under, and in accordance with, the conditions of a certificate of registration obtained
from the Board in accordance with the regulations made under this Act. No depository,
participant, custodian of securities, foreign institutional investor, credit rating agency, or any
other intermediary associated with the securities market as the Board may by notification in
this behalf specify, shall buy or sell or deal in securities except under and in accordance with
the conditions of a certificate of registration obtained from the Board in accordance with
the regulations made under this Act.7 Further, no person shall sponsor or cause to be
sponsored or carry on or caused to be carried on any venture capital funds or collective
investment scheme including mutual funds, unless he obtains a certificate of registration from
the Board in accordance with the regulations. Every application for registration shall be in
such manner and on payment of such fees as may be determined by regulations. The Board
may, by order, suspend or cancel a certificate of registration in a prescribed manner, as may

5
BALASUBRAMANIAN, CORPORATE BOARDS AND GOVERNANCE. (1988). New Delhi: Sterling.
6
BANERJEE, A. M & K. A. CHANDRASEKARAN RENEWING GOVERNANCE: ISSUES AND OPTIONS. (1996). New
Delhi: Tata McGraw Hill.
7
Bhagawati, J. India in Transition: Freeing the Economy. (1993). Oxford: Oxford University Press.

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be determined by regulations under this Act. However, no order shall be made unless the
person concerned has been given a reasonable opportunity of being heard.8

Depositories Act, 1996

This Act was enacted to provide for regulation of depositories in securities and for matters
connected therewith or incidental thereto. It provides for the introduction of scripless trading
system and settlement, which is considered necessary for the effective functioning of the
securities markets. As per the Act, the term 'depository' means "a company formed and
registered under the Companies Act, 1956 and which has been granted a certificate of
registration under sub-section (1A) of section 12 of the Securities and Exchange Board of
India Act, 1992".No depository shall act as a depository unless it obtains a certificate of
commencement of business from the Board (the SEBI). The Board shall grant a certificate
only if it is satisfied that the depository has adequate systems and safeguards to prevent
manipulation of records and transactions. However, a certificate shall not be refused unless
the depository concerned has been given a reasonable opportunity of being heard.A
depository shall enter into an agreement with one or more participants as its agent, in such
form as may be specified by the bye-laws.9 Any person, through a participant, may enter into
an agreement, in such form as may be specified by the bye-laws, with any depository for
availing its services. Any such person shall surrender the certificate of security, for which he
seeks to avail the services of a depository, to the issuer in such manner as may be specified
by the regulations. The issuer, on receipt of certificate of security, shall cancel the certificate
of security and substitute in its records the name of the depository as a registered owner in
respect of that security and inform the depository accordingly. A depository shall, on receipt
of information, enter the name of the person referred in its records, as the beneficial owner.
On receipt of intimation from a participant, every depository shall register the transfer of
security in the name of the transferee. If a beneficial owner or a transferee of any security
seeks to have custody of such security, the depository shall inform the issuer accordingly.
Every person subscribing to securities offered by an issuer shall have the option either to
receive the security certificates or hold securities with a depository.10

8
ibid
9
BLAIR, MARGARET OWNERSHIP AND CONTROL: RETHINKING CORPORATE GOVERNANCE IN TWENTY-FIRST
CENTURY. (1998). Washington, D.C.: Brookings Institution.
10
BOATRIGHT, JOHN R ETHICS AND THE CONDUCT OF BUSINESS. (2003). Delhi: Pearson Education.

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11. STEPS TAKEN FOR ENSURING EFFECTIVE CORPORATE GOVERNANCE

The Companies Act, 2013 was enacted on August 30, 2013 which provides for a major
overhaul in the Corporate Governance norms for all companies. The rules pertaining to
Corporate Governance were notified on March 27, 2014. SEBI decided to review the
provisions of the Listing Agreement in this regard with the objectives to align with the
provisions of the Companies Act, 2013, adopt best practices on corporate governance and to
make the corporate governance framework more effective. Hence, Clause 35B and Clause 49
of the Equity Listing Agreement have been replaced by new listing agreement.This
article highlights the major changes :

Amendments in Clause 35B

This clause is applicable to all listed companies. As per revised clause the Company shall
provide e-voting facility to its shareholders, in respect of all shareholders’ resolutions, to be
passed at General Meetings or through postal ballot.Such e-voting facility shall be kept open
for such period specified under the Companies (Management and Administration) ules, 2014
for shareholders to send their assent or dissent.The Company shall continue to enable those
shareholders, who do not have access to e – voting facility, to send their assent or dissent in
writing on a postal ballot. 11The Company shall utilize the service of any one of the agencies
providing e-voting platform, which is in compliance with conditions specified by the MCA,
Government of India, from time to time.Issuer shall mention the Internet link of such e-voting
platform in the notice to their shareholders.

Amendments in Clause 49

The Clause 49 of the Listing Agreement shall be applicable to all companies whose equity
shares are listed on a recognized stock exchange from 1st October, 2014. The provisions
relating to constitution of a Risk Management Committee shall be applicable to top 100
listed companies by market capitalization as at the end of the immediate previous financial
year. The provisions with regards to the Related Party Transactions shall be applicable to all
prospective transactions. 12The main objectives of the amendment were to align the provision

11
AKOI, M. & H. KIM CORPORATE GOVERNANCE IN TRANSITIONAL ECONOMIES: INSIDER CONTROL AND THE
ROLE OF BANKS. (eds.) (1995). Washington, D.C.: The World Bank.
12
.ibid

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of listing agreement with Companies Act, 2013. This is Clause 49(I) of the Listing
Agreement. It states the purpose for which the Clause 49 is instated. In case of any
ambiguity, the provisions of Clause 49 shall be interpreted and applied in alignment with
these principles. Main objectives of the clause are:

• The Rights of Shareholders

• Role of stakeholders in Corporate Governance

• Disclosure and transparency

• Responsibilities of the Board

• Board of Directors (“BOD” or “Board”)

Corporate governance principles [clause 49 (i)]

Under this section SEBI specifies and explains the rights of shareholders and other stake
holders, the duty of a corporate to protect stakeholders’ interests, duty and responsibilities of
the board. This specifies that the disclosures must be made regarding proper compliance of
prescribed standards of accounting, financial and non- financial disclosure and be
transparent13

Board of Directors [clause 49 (ii)]

This sub-clause specifies the composition of board, inclusion of restrictions on independent

directors, the tenure of independent directors, corporate code of conduct and whistle blowing
policy.14

Audit committee [clause 49 (iii)]

As per this, amended, clause the audit committee should have at least 3 members and out of
which 2/3rd members be independent directors. All the members must be financially literate
and one member must be an expert in accounting or related financial management. This
committee has to sit at least 4 times in a year with a gap of not more than four months in

13
CHAKRABORTY, S. K. THE MANAGEMENT AND ETHICS OMNIBUS . (2002). New Delhi: Oxford University
Press.
14
CHARKHAMJ.P. KEEPING GOOD COMPANIES:A STUDY OF CORPORATE GOVERNANCE IN FIVE COMPANIES .
(1994). New Delhi: Oxford University Press.

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between two meetings. Through this amendment, SEBI specifies the powers, role and
responsibilities of audit committee members.15

Nomination and Remuneration committee [clause 49 (iv)]

There should be minimum of 3 members in the nomination and remuneration committee and
all members be non- executive directors and half of them be independent directors. This
clause states the role of the Committee which includes formulation of criteria to evaluate
Independent directors, policy devising on Board diversity, identifying prospective directors
and senior management in accordance with the criteria laid down, recommendation to the
Board policies relating to remuneration of directors and other employees including key
managerial personnel.16

Requirements W.R.T. subsidiary companies [Clause 49 (v)]

This sub-clause specifies the responsibilities of listed and unlisted subsidiaries of listed
holding companies. Provisions as to unlisted subsidiary company: (a) at least one
independent director of the holding company should be director on the board of Director of
materially un-listed Indian subsidiary company, (b) the audit committee of the listed holding
has to review the financial statements materially un-listed Indian subsidiary company.17

Risk management [Clause 49 (vi)]

Under this clause SEBI makes it an obligation of BOD of the top 100 companies by market
capitalization to constitute the risk management committee and has to determine its role and
functions and delegate powers as it may deem fit. As per SEBI regulations this committee
should consist of Board members. Senior Executives may become the member of the
Committee but the Chairman of this Committee shall be a member of Board of Directors.18

Related party transactions [Clause 49 (vii)]

15
CHOUDHARY, NAGENDRA V. CORPORATE GOVERNANCE IN EMERGING MARKETS. . (ed.) (2003) Hyderabad:
ICFAI.
16
GERA, M. R. CORPORATE GOVERNANCE AND BUSINESS ETHICS. (ed.) (1997). New Delhi: Excel Books.
17
GIRI, ANANTA K. VALUES, ETHICS AND BUSINESS. (1998). Jaipur: Rawat Publications.
18
ibid

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This requires the companies to place periodically, in summary form, before the audit
committee all the information on the related party transactions in the ordinary course of
business.

Disclosure Norms [Clause 49 (viii)]

Disclosure norms will be more stringent than ever before under the proposed revision to
clause 49 of the listing agreement. Under the revised clause, quarterly report disclosing
details on all material facts related party transactions along with compliance report on
Corporate Governance be disclosed on its website and a web link stated in its annual reports.
Again details as to any change in the accounting treatment used in financial statements, all
information on the remuneration of Directors, directors’ relationship with the company are
disclosed along with the annual report.19

Certification from Chief Executive Officer (CEO) and Chief Finance Officer (CFO)
[Clause 49 (ix)]

Under this sub-clause Board of Directors and Chief Executive Officer and Chief Finance
Officer are made more accountable and responsible. They must certify that they have
reviewed the financial statements and the cash flow statements to the best of their knowledge.
Then they have to certify that the Company hasn’t entered into any transaction which is a
violation of Company’s Code of Conduct, illegal or fraudulent to the best of their knowledge.
Again it will be their duty to inform the Auditors and Audit committee on any significant
changes made in internal control over financial reporting, changes in accounting policies,
cases of significant fraud that they have come across.20

Compliance Certificate on Corporate Governance [clause 49 (x) and (xi)]

SEBI, under the amended clause 49 of listing Agreement, requires corporate to obtain the
Compliance Certificate on Corporate Governance from the Auditor of the Company or from a
Practicing Company Secretary. Such certificate shall become separate part of Annual Report.
Certificate is also to be submitted to Stock Exchange along with the Annual Report.21

19
GOPALSAMY N. CORPORATE GOVERNANCE: THE NEW PARADIGM. (1998). New Delhi: Wheeler Publishing
20
HAZARIKA, ANJALI CORPORATE SOCIAL RESPONSIBILITY AND THE OIL- GLOBAL EXPERIENCEs. (ed.)
(1998).New Delhi: Tata McGraw Hill.
21
ibid

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12. HARSHAD MEHTA SECURITIES FRAUD (1988-1995)

In 1988, SEBI had limited powers. Chiefly it regulated the securities market and ensured its
constant development. SEBI had no control over the transactions taking place between the
brokers and the investors. However, the scenario changed completely after the Harshad
Mehta Securities Fraud. Harshad Mehta was a stockbroker and started his own securities firm
in 1990- “Grow More Research & Asset Management Limited”. He was reputed and revered
in the markets. Being considered the “Sultan of Dalal Street”, investors blindly followed
Mehta’s footsteps. Mehta misused his status to manipulate the stock prices of certain shares
on the scrip for his personal financial gain.

Basically what Harshad Mehta did was invest large sums of money in a particular share.
Seeing him invest, the other shareholders and investors also invested in the same shares. This
resulted in unnatural pumping of money into the stock markets causing a rise in the price of
these shares on the scrip. Unnatural inflation of stock prices resulted in the Bull Run411. This
Bull Run increased the share price of companies like Associated Cement Company (ACC),
the first company Mehta invested in in the stock markets, from Rs.200/- to Rs.9000/- a
4400% increase over the course of 1 year (1991-1992).

The above operation though immoral was not illegal but the problem arose because Mehta
obtained capital to invest in the stock markets by misappropriating banks’ money. When
banks gave Mehta cash to purchase government securities owned by other banks, he invested
this money into the stock markets, sold the purchased shares at a profit after a period of 7
days or so and then completed the purchase of government securities. The money handed
over to Mehta was given for a specific purpose and he wrongfully used the money for
personal gain. This falls within the scope of money laundering. Thus, Mehta made
approximately Rs. 5000 crores by investing misappropriated money in the securities markets.

Mehta owned 50 lakh shares of more than 130 companies. When his scam was revealed by
Sucheta Dalal, a renowned journalist of the time, he offloaded most of his shares to save
himself from prosecution. The investors felt that they had been cheated by Mehta and sold of

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their shareholdings in order to safeguard themselves. This unabated selling caused the
markets to lose Rs. 0.1 million412 in 1 day.

SEBI, having no authority to regulate the transactions between investors and brokers, was
handicapped. The only authority with the jurisdiction to look into the matter was the Central
Bureau of Investigation (CBI). The government was made aware of this major gap in the
regulation of securities markets and after introspection they decided to bestow SEBI with
greater powers promoting it to the status of “market regulators”. In lieu of this, the
Legislature speedily approved the SEBI Act, 1992.

The SEBI Act gave SEBI a 3 fold duty-

 Protection function- To protect the stock markets from unscrupulous investors and to
protect the investors from unfair market practices.

 Development Function- To develop the stock markets healthily and lawfully.

 Regulation Function-: To regulate the transactions between brokers, investors and the
stock market to ensure fair play.

In addition to this, the SEBI Act, 1992 deemed SEBI a statutory authority with a separate
legal existence.

The 1992 scam elevated SEBI from a regulatory authority to the level of a statutory authority.

Harshad Mehta Securities Scam (1996-2000)

This development of SEBI between 1988- 1995 was evident when Mehta tried to pull off a
2nd scam in 1997.

In 1997, Mehta tried to re-enter the markets by creating a network of front companies called
Damayanti Group. This group operated out of the same office as Mehta’s 1990 securities
firm. Mehta employed brokers and agents who bought and sold shares at the stock market on
his behalf for a commission. Harshad Mehta even managed to find companies (e.g. - BPL,
Videocon and Sterlite Industries) who gave him start-up capital to set up this second venture
in exchange for him inflating the price of their shares in the stock market. Mehta stuck to his

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original modus operandi of investing large sums of money into certain shares and tried to
bring about a Bull Run. However the investors and SEBI had become too smart to fall for
Harshad Mehta’s tricks. In 1998, SEBI having smelled foul play in the sudden increase of
certain share prices on the scrip investigated the matter, managed to link the Damayanti
Group to Harshad Mehta and his associates through telephone bills, payment to lawyers,
investment details, etc. and filed a case against Harshad Mehta and his associates in the
courts. SEBI curbed Harshad Mehta before he could harm the investors and manipulate the
markets. In 10 years, SEBI had already grown immensely and was well on its way to
becoming the market watchdog.

List of Changes by SEBI after the Harshad Mehta Securities Scam

 Strict full disclosure norms were introduced. The full disclosure norms were with
respect to material facts, specific risk factors, prudential norms, etc.

 The Listing Agreement413 was introduced and adherence to it was made mandatory
by all listed companies.

 A code of advertisement was introduced to ensure that the companies disclosed all the
information in an honest and trusted manner to the investors at the time of making a
public offer for purchase of securities.

 The National Stock Exchange (NSE) with online, screen based, nation-wide electronic
trading was introduced to increase transparency of operations.

 The Bombay Stock Exchange (BSE) switched over to online, screen based trading.

 A revised “carry forward” system replaced the “badla”414 system.

 Guidelines regarding requirements of full disclosure to SEBI were introduced.

 Requirements to be fulfilled before making public offers for purchase of securities to

the public were also introduced.

Byraraju Ramaa Raju Vs. CBI (Satyam Scam)

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The Satyam Scandal came to light on 7th January, 2009 by way of a confession letter written
by B. Ramalinga Raju (the Founder and Chairman of Satyam Computers Services Limited)
published in the Times of India. In the confession letter Raju confessed to manipulating his
books of accounts by overstating assets by Rs. 2161 crores, understating liabilities by Rs.
1020 crores, including non- existent interest worth Rs. 376 crores and inflating cash reserves
by Rs. 5040 crores. In addition to this Ramalinga Raju obtained loans worth Rs. 2000 crores
from nonbanking financial companies (NBFC’s) by offloading shares worth thousands of
crores illegally onto front companies to portray a better financial condition than the reality.
There were charges of money laundering levied on Raju because he used the illegally
obtained money from NBFC’s for the purpose of purchasing land. The whole scam cost the
markets approximately Rs. 14, 000 crores. The books of accounts are a reflection of the
company’s financial standing. They are important tools that enable investors and shareholders
to determine whether or not they want to invest in a particular company. Ramalinga Raju
manipulated the books of accounts to cheat investors and shareholders into believing that the
company was doing better than the reality. Raju managed to run the scam past the auditors,
Price Waterhouse Coopers (PWC) for 7 years. Raju flouted SEBI Regulations of Fraudulent
and Unfair Trade Practices (FUTP), SEBI Regulations for Prevention of Insider Trading
(PIT) and SEBI Regulations for Issue of Capital and Full Disclosure Requirements (ICDR).
The Satyam Scam was a major setback to SEBI. However, SEBI managed to hit back
strongly. It investigated the matter and readjusted the books of accounts to reflect the real
financial position of the company. After a complete study into the scam, SEBI released an
order which was the first of its kind. SEBI held Ramalinga Raju and the 9 major associates
including B. Rama Raju (the Managing Director), Vadlamai Srinivas (Chief Financial
Officer), G. Ramakrishnan (Vice President) and V.S. Prabhakara Gupta (Head of Internal
Audit) guilty of insider trading, indulging in fraudulent and unfair trade practices and
violation of Clause 49 of the listing agreement.. In its order SEBI ordered the 10 accused to
pay Rs. 1850 crores + 12% simple interest (roughly amounting to Rs.3000 crores) within 45
days and banned any of them from accessing the securities markets in any way for 14 years.
This order, along with the changes introduced by SEBI, was a message to the securities
markets and the investor communities that SEBI was becoming stronger. The order spoke
volumes of the growth SEBI has seen in 20 years of its existence. Even though SEBI was not

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successful in detecting the scam on its own, it managed to lash back strongly to ensure such a
scam never occurred again.

List of Changes by SEBI after the Satyam Scandal-:

 A record of all transactions with respect to the stock markets to be maintained by the
companies for inspection by SEBI.

 Regular monitoring of all transactions by SEBI between investors, shareholders,

brokers and the company.

Special attention to large, unusual transactions by SEBI while inspection of balance sheets.

 Appointment of the Chief Financial Officer (CFO) to be made by the Audit

Committee after proper assessment of their background, qualifications, etc.

 Appointment of Independent Directors on the Board to ensure the fair and honest
functioning of the company. No stock options to be given to these directors and the
salary should also be given in the form of reimbursements.

 Several audit norms were introduced like the mandatory rotation of auditors/ audit
firms every 5 years.

 Preventing auditors from undertaking any non–audit related to activities to ensure that
the auditors are true to their work and there is no conflict of interest.

Adoption of the International Financial Reporting Standards (IFRS) by all major companies
in the preparation of various financial reports by the companies.

 Interim Disclosure of balance sheet figures (audited balances of major account heads)
on a half yearly basis.

 Strict timelines for the submission of various financial reports to SEBI throughout the
year.

Sahara Scam (2009- Present)

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The Sahara Scam is the biggest victory for SEBI in recent times. Sahara India floated 2 new
companies- Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing
Investment Corporation (SHIC) in 2005 by registering them under the Companies Act, 1956
with the relevant Registrar of Companies in Kanpur and Maharashtra respectively. In the
annual meetings held by both the companies, a resolution was passed to raise funds through
private placement of optionally fully convertible debentures (OFCD’s) from the friends,
associates, and family members of the Board of Directors. Funds were also to be raised
through the circulation of an information memorandum to a few trusted investors. The date of
commencement of issues of the debentures was 25th April, 2008 and 20th November, 2009,
respectively. SIRECL collected Rs. 17,656.53 crores (net value) between 25th April, 2008
and 13th April, 2011. SHICL collected Rs. 6373.20 crores (net value) between 20th
November, 2009 and 13th April, 2011. Thus both the companies collected Rs. 24,029.73
crores from 30 million investors over a period of 3 years. In 2009, when a red herring
prospectus for Sahara Prime City (a real estate venture of Sahara India) was submitted to
SEBI for approval, SEBI noticed unusual fund raising activity in the 2 firms- SHICL and
SIRECL. On 4th January, 2010, SEBI received a complaint from a man, Roshan Lal, who
alleged that “illegal means were being used by SHICL and SIRECL in issuance of OFCD’s.”
Following this, SEBI launched an investigation against Sahara India, inquiring into the fund
raising activities of SHICL and SIRECL along with investor information. Following the
investigation and finding Sahara guilty, SEBI passed an interim order, ordering the payment
of Rs.24, 000 crores + 17% interest to 30 million investors. The SEBI order was passed by
the Securities Appellate Tribunal (SAT) and subsequently the Supreme Court on 12th
August, 2012. This was the first time in the history of SEBI that it had caught such a huge
scam on its own. SEBI’s vigilance and alertness, the expansion of its powers and its strong
investigative instinct was revealed in this scam. Detecting the Sahara Scam is a massive
achievement for SEBI and is a testament to the growth of SEBI in the last 3 decades since its
inception in 1988. However, the Sahara Scam is also the biggest securities scam in India. It
resulted in 30 million investors losing their hard earned money. The fact that it was detected
after 3 years and had cost the markets Rs. 25, 000 crores was a matter for concern. Thus the
government has taken steps to tighten SEBI’s hold on the securities markets still further and
has bestowed more powers on the SEBI.

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List of Changes made in SEBI after the Sahara Scam-:

 Before the Sahara Scam, the term “private placement” had not been defined in the
Companies Act. Only those instances where an offer would not qualify as a “public
offer” had been defined. On SEBI’s recommendation, S.42 was introduced in the
Companies (Amendment) Act, 2013. It defined private placement “as any issue of
securities by a listed or an unlisted public company to 49 or less people where
individual invitations to buy are sent to the investors.” As soon as the number of
investors rose to 50 and beyond, the issue of shares would be declared a public offer
and would have to be verified and approved by the SEBI.

 The government gave SEBI the power to regulate any money pooling worth Rs.100
crores or more.

 The government has given SEBI the authority to seize the assets of the people who
do not comply with the “seize and search” orders issued by the SEBI Chairman.

 The government has instructed SEBI to create a new law to control illicit investment
schemes. SEBI is in the process of drafting this law and sending it to the required
authorities for approval.

 SEBI now has the right to retrieve and investigate the telephone records, etc. with
respect to any securities investigation.

 Chit funds, nidhi schemes and housing schemes (collective investment schemes) that
are not regulated by any particular authority and have a corpus greater than Rs.100
crores have to be regulated by SEBI and follow all regulations as deemed fit by
SEBI.

13.CONCLUSION AND ANALYSES

From practically no powers when it was formed in 1988, SEBI has become the prime market
regulator for the stock exchanges in India. SEBI has the power to react to problems,
investigate situations, protect the investors, brokers, banks, companies, etc. and develop the

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securities markets.SEBI also needs to be proactive and institute policies in anticipation of
22
situations contingent in nature. For instance after the Satyam Scam, SEBI has instituted
policies to verify the balance sheets of companies listed on the NSE and BSE on a quarterly
basis, to bring about mandatory rotation of auditors/audit firms dealing with a company and
enforcing a whistleblower policy in each company. These reforms were necessary and
relevant. However, SEBI has been going overboard in its regulation off late. In recent times,
every time there has been a scam or a problem related to the securities markets, the
government has dumped SEBI with greater powers and responsibilities. Some of the powers
are redundant and restrict fair business practices. Due to certain large scale scams in the
recent past, SEBI has become over vigilant and is conducting investigations that are
23
unnecessary and time consuming. A classic example of this over vigilance is the recent
induction of S.42 in the Companies (Amendment) Act, 2013 that defines private placement as
“any offer or invitation to not more than 49 people by way of a personal invitation for
purchase of securities.” SEBI is being over burdened with too many functions. It would be
more conducive if SEBI had a varied but relevant bouquet of responsibilities that would
ensure efficient functioning of the regulatory authority. The over regulation happening
currently must stop. It is tiresome and needs to be done away with so that SEBI does not
drown in its pool of duties and maintains its position as the market watchdogs.

22
KAPOOR, N. D. CORPORATE LAWS AND SECRETARIAL PRACTICE. (2004). New Delhi: Sultan Chand & Sons.
23
JOSHI, VASUDHACORPORATE GOVERNANCE: THE INDIAN SCENARIO (2004). New Delhi: Foundation Books.

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