Not long ago, there was moribund
outfit in New Delhi called the Ministry of Corporate
Affairs (MCA). Regulating all firms registered under
The Companies Act, from the tiny to the immense, it
ran like most government ministries replete with
clerks, section officers and Class I civil servants.
With some exceptions, the IAS officers were not
especially noted for their zeal, knowledge or
ability; and the ministers were unhappy at what they
considered as an inferior posting, disinterestedly
marking time for worthier opportunities.
Then there was the Securities and Exchange Board of
India (SEBI). A modern creature of the post-1991
reforms located in the commercial capital of India,
the SEBI had a more exciting remit. It looked after
the interest of retail investors; oversaw the
capital market; and focused on the big fish — the
publicly listed companies of the land that comprised
the overwhelming bulk of capital employed in India.
Until the Satyam scandal in January 2009, that was
the order of things: a slow and generally
ineffectual bureaucracy headquartered in Delhi
without the resources to monitor India’s corporate
sector; and a quick-on-the-uptake regulator at
Mumbai that mostly made the right kind of
interventions when needed.
Thanks to energetic interventions of the minister of
the time, Prem Chand Gupta, the MCA did itself proud
in handling various aspects of the Satyam fiasco —
so well that you wouldn’t believe that it could
happen in India. In contrast, the SEBI, under C.B.
Bhave, was seen to fall short. The balance of power
shifted to the MCA, with the SEBI becoming a
follower. As it remains today.
Energised by the limelight, the MCA drafted various
versions of a brand new Companies Bill, piloted it
through the Standing Committee of the Parliament,
and got it passed by the Lok Sabha. It will soon
become law. The SEBI, whose corporate governance
mandates under Clause 49 of the Listing Agreement
were more modern than the sections in The Companies
Act, 1956, is now on the back-foot.
So, it has to demonstrate that it is in the running,
which it is doing by circulating a consultative
paper on corporate governance. After 11 pages of
showing that it knows all about the corporate
governance of jurisdictions near and far, it makes
its proposals. Most are to align Clause 49 to the
new legislation. Some are also well thought of. But
others are totally over-board. Let me share a few.
The first is that the appointment of independent
directors should be only by minority shareholders.
Only Italy has this in its statute book, a country
famously renowned for its excellence in corporate
governance. The SEBI forgets that directors,
independent or otherwise, are appointed by all
shareholders. One might conceivably advocate postal
ballot for the election of directors. But to claim
that the voting college for independent directors
must be minority shareholders because otherwise such
fiduciaries may be prone to act according to the
will of the majority shareholder is balderdash. It
is an attempt for the SEBI to prove that it is
holier than the MCA.
The second is the performance evaluation of
independent directors. It is gross legislative
overreach of The Companies Bill to mandate this. The
SEBI goes a step further and proposes to determine
what elements should constitute such an evaluation.
Such love for regulatory minutiae is one of form
trumping substance, by which the SEBI hopes to take
the moral high ground in corporate governance.
Third, to be classified as an independent director,
The Companies Bill proposes that none can serve on
the board of more than ten public companies, listed
or otherwise. The SEBI wishes to be holier still,
and wants a debate on whether it should be
restricted to seven listed companies.
Fourth, and this is another example of regulatory
overreach, the SEBI wants to examine whether board-
or committee-level discussions on succession
planning should be mandatorily disclosed to the
Fifth, because The Companies Bill states that
evaluation of a company’s risk management systems
should be examined by the board’s audit committee,
the SEBI wants to go further — such as appointing
Chief Risk Officers and determining specific
parameters and requirements of the risk management
Again, form over substance, with too much regulatory
interference in the internal governance of
This list gives a flavour of proposed regulatory
interferences in the running of companies — first by
the Bill, and now by the SEBI. Let me end by stating
that since the late 1980s, I have been known as a
corporate governance advocate. But I hate it being
equated with ‘ticking the check-list’,
form-over-substance clauses. My plea is that the
SEBI return to what it is respected for — sane
mandates backed by prompt execution, instead of
trying to show who is fairest of them all.
Published: Business World, January 2013