Thursday, 19 July 2012



“Corporate governance is not a matter of right or wrong -'it is more nuanced than that.” 

- Advocate Johan Myburgh

India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company." It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution.

In the corporate governance area, there are few issues quite as important as the role of stock exchanges in the governance process. Stock exchanges can play a substantial or limited role in the process. In the India, they are major players, requiring boards with a majority of independent directors and various committees, likewise staffed with independent directors. In that sense, the NSE & BSE have a substantial regulatory role.

SEBI committee defined the objective of corporate governance as the maximization of shareholders’ wealth keeping in mind the interests of the other stakeholders. However, we must also ensure that the interests of other shareholders are not getting affected in the process.


The OECD Steering Group on Corporate Governance has embarked on a project on The Role of the Stock Exchanges in Corporate Governance suggesting a number of issues arising from recent changes in the role of the exchanges. The role of exchanges in corporate governance has also been examined in work with non-member countries and further work on this topic is foreseen in the context of the Asian and Latin American Corporate Governance Roundtables.

Other international organisations and industry groups have also in recent years considered stock exchanges’ regulatory functions, and the closely related topic of competition between exchanges. This includes work by the International Organisation of Securities Commissions (IOSCO) in 2006 as well as the World Federation of Stock Exchanges (WFE) has so far been addressed only tangentially. Independent academic literature, on the other hand, has addressed some of the issues of this article. Ever since the first demutualisation of an exchange (Stockholm in 1993) studies of listing, competition, consolidation and internationalisation of exchanges has become a rapidly growing industry.


Stock exchanges have established themselves as promoters of corporate governance recommendations for listed companies. Demutualisation and the subsequent self-listing of exchanges have spurred debate on the role of exchanges. The conversion of exchanges to listed companies is thought to have intensified competition. And, the sharper competition has forced the question of whether there is a risk of a regulatory ''race to the bottom".

Also exchanges are uneasy about the prospect of having to continue performing their traditional regulatory and other corporate governance enhancing functions amid a shrinking revenue base. Therefore extension of role and wider responsibility are always welcome.

Following points show relevance of role of Stock Exchanges’ in the Corporate Governance:

1.Stock exchanges in the region developing rapidly; new exchanges being established
2. Stock exchanges remain government owned entities
3. CG codes proliferating, some no longer voluntary
4. Regulatory or enforcement powers of exchanges limited
5. Room for strengthening of listing rules
6. Disclosure of listed companies requires further attention
7. No evidence of race to the bottom, need to align with industry peers


Historically, the main direct contribution of exchanges to corporate governance has been listing and disclosure standards and monitoring compliance. The regulatory function of stock exchanges was in the past mostly limited to issuing rules and clarifying aspects of existing frameworks. The standard-setting role of stock exchanges was essentially exercised through the issuance of listing, ongoing disclosure, maintenance and de-listing requirements. On the enforcement side, stock exchanges have shared their regulatory function with capital market supervisory agencies. In addition to overseeing their own rules, stock exchanges were assigned the role of monitoring the compliance with legislation and subsidiary securities regulation. Since the promulgation of the SEBI, stock exchanges have often enlarged their regulatory role to embrace a wider palette of corporate governance concerns. They have contributed to the development of corporate governance recommendations and encouraged their application to listed companies. The objective of the following part of the article is to summarize these key channels for exchanges’ contributions to good corporate governance in listed companies. 


1. Exchanges act as a source of corporate governance related regulation

Exchanges provide complementary rationales for establishing themselves as a source of corporate governance-related regulations. In essence, by raising transparency and discouraging illegal or irregular practices, exchanges are act as regulatory authorities. The regulatory function of exchanges is exercised in the context of an existing legal framework. Exchanges' ability to introduce and enforce regulations is obviously circumscribed by the authority of the relevant market regulators. To the extent that the relevant laws or securities regulation already address corporate governance of listed companies, the role of exchange regulation can therefore only be complementary. For instance, rules on prospectus issuance follow largely from SEBI Prospectus Directive which may have further limited the scope of standards setting by exchanges. Even in jurisdictions where exchanges are empowered to issue regulations, they may be subject to an approval by another regulatory authority, e.g., in the India, proposed changes to exchange rules must be filed with the SEBI.

2. Exchanges played a central role in the effective implementation of national corporate governance codes

“Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” One of the first among such endeavors was the CII Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The committee was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two committees to look into the issue of corporate governance – the first chaired by Kumar Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three years later. The SEBI committee recommendations have had the maximum impact on changing the corporate governance situation in India. The Narayana Murthy committee worked on further refining the rules. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures.

3. Compliance requirements

Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e. supervision) of stock exchange authorities. Clause 49 of the listing agreement with stock exchanges provides the code of corporate governance prescribed by SEBI for listed Indian companies. With the introduction of clause 49, compliance with its requirements is mandatory for such companies. Exchanges have played a pioneering role in the development of the Indian securities market.

4. Awareness raising efforts have also played a role
Some exchanges have been actively involved in increasing the awareness around the value of good corporate governance. For instance, The National Stock Exchange (NSE) a leading stock exchange covering various cities and towns across the country has established & organized training sessions and other educational projects in order to increase the awareness of securities market & good governance practices and the Code of Best Practice for Listed Companies. Such programmes not only serve the general public but also require corporates to maintain good governance in light of investor awareness. In the same way an equally important accomplishment of BSE Limited is its nationwide investor awareness campaign - "Safe Investing in the Stock Market" under which awareness campaigns and dissemination of information through print and electronic medium is undertaken across the country. BSE Limited also actively promotes the securities market awareness campaign of the Securities and Exchange Board of India.


While competition among stock exchanges is not new, it has intensified in recent years in various areas of exchange activities, including trading, listing and settlement. In addition to the obvious effects of demutualisation and listing of exchanges, a rapid improvement in information technology and the creation of innovative financial instruments have also been among the key factors. In consequence, the traditional view of exchanges as the controllers of – at least some has been severely shaken. Exchanges are increasingly seen as providers of specific services in competitive markets, which include trading, but may or may not include settlement and other activities 

Moreover, the scope of competition has broadened from the national to the international level. While yesterday's competitors were, for example, domestic exchanges such as NSE and BSE, today's competition is between large consolidated groups operating in an internationalised financial market place. The emergence of international exchange groups in fact mirrors the evolution of the listed companies sector itself. Historically, the focus of exchanges was on attracting domestic issuers, which encouraged competition for listings among different national exchanges. As this focus has shifted on attracting large international companies, including foreign ones, exchanges' basis of operations has shifted accordingly. Competition between exchanges, both for domestic and foreign listings, has therefore intensified.


Effective corporate governance provides for more efficient allocation of resources, as the return on assets in countries with the highest levels of corporate governance is double that of the return on assets in countries with the lowest levels of corporate governance. India has been proactive throughout its past 20 years of economic liberalization in bringing regulations to help foster effective corporate governance that contributed to its economic growth.


Development of norms and guidelines are an important first step in a serious effort to improve corporate governance. The Ministry of Corporate Affairs has proposed the New Companies Bill 2008 which aims to improve corporate governance by vesting greater powers in shareholders. These have been balanced by greater emphasis on self-regulation, minimization of regulatory approvals and increased and more transparent disclosures. The existing (Clause 49) and ensuing (The Companies Bill, 2008) legislations do cover the fundamentals of effective corporate governance and India compares favorably with most other developing and Asian economies as far as the adequacy of corporate governance regulations are concerned. Improved corporate governance, however, does not solely rest on control through increased regulations. The bigger challenge in India, however, lies in the proper implementation of those rules at the ground level. In India at present there are 23 recognised stock exchanges along with NSE & BSE playing a prominent role in carrying out objectives of SEBI rules, regulations & guidelines in true letter and spirit.
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1. OECD Document on Role of Stock Exchanges’ in Corporate Governance by Hans Christiansen & Alisa Kolderstova

2. Corporate Governance in India – Evolution and Challenges by Rajesh Chakrabarti, College of Management, Georgia Tech
3. The state of corporate governance in India - A Poll by KPMG (

4. Official website of National Stock Exchange (

5. Official website of Bombay Stock Exchange (

Tuesday, 28 February 2012

SEBI's New Takeover Code

SEBI'S New Takeover Code 

Vide Notification dated September 23, 2011, Market watchdog SEBI has notified the much awaited New Takeover Regulations namely SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as “SEBI (SAST) Regulations, 2011”) which will replace the existing Takeover (SAST) Regulations, 1997. The new Regulations shall come into force on the 30th day from the date of their publication in the Official Gazette i.e. w.e.f. October 22, 2011, any acquisition or sale of shares of Listed Company shall be governed by provisions of SEBI (SAST) Regulations, 2011.

Highlights of New Takeover Regulations are as under:

1. Increase in Initial Threshold Limit from 15% to 25%.

The Initial Threshold limit provided for Open Offer obligations is increased from 15% to 25% of the voting rights of the Target Company. Since SEBI (SAST) Regulations, 2011 will be applicable from October 22, 2011, thus it’s a last opportunity for all the Promoters holding less than 25% but more than 20% to come within bracket of Creeping Acquisition. Otherwise even the existing Promoters of these Companies have to give offer to consolidate their holding.

2. Creeping Acquisition Limit raised from 15%-55% to 25%-75%:

Now there will a single and clear creeping acquisition bracket. This will be available to all persons holding 25% or more but up to 75% i.e maximum permissible non-public holding shall be eligible for creeping acquisition of 5% each financial year.

3. Open Offer Trigger Point based on Individual Holding:

Now the Individual Acquirer Shareholding shall also be considered for determining the Open Offer Trigger Points apart from consolidated promoter shareholding. (Regulation 3(3) of SEBI (SAST) Regulations, 2011)

4. Increase in Offer Size from 20% to 26%.

The Offer Size is increased only upto 26% instead of TRAC Recommendation of 100%. It’s a good move from the point of view of domestic acquirers on account of lack of proper bank funding options available in India

5. New Provisions in case of increase in shareholding beyond the maximum permissible non-public shareholding due to Open Offer

Obligation on the acquirer to bring down the non-public shareholding to the level specified and within the time permitted under Securities Contract (Regulation) Rules, 1957; 
Ineligibility to make a voluntary delisting offer under SEBI (Delisting of Equity Shares) Regulations, 2009, unless a period of twelve months has elapsed from the date of the completion of the offer period. 

6. Abolition of Non-compete fees.

SEBI has accepted the TRAC Recommendation of scrapping the non-compete fee or control premium. Any amount paid to the Promoters/Sellers whether as consideration, non-compete fee or control premium or otherwise, shall be added in Offer Price and hence public shareholders shall be given offer at the highest of such prices.

7. Definition of “Control” modified:

A new definition of Control has been introduced in the new Regulation which is similar to recommendation of TRAC Report with an exception that the word “Ability” has been removed. The definition is as under:

“Control” includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner:

Provided that a director or officer of a target company shall not be considered to be in control over such target company, merely by virtue of holding such position

8. Change in Control

Any change in control of the listed company shall be only after Open Offer. The exemption from Open Offer available in case of change in control without acquisition of substantial shares, through a special resolution by postal ballot process, has been withdrawn and now the only route available for change in management and control is through the Open Offer to the shareholders of the Target Company. This is in contrast with the Regulation 12 of the SEBI (SAST) Regulations, 1997 which provides for the change in control through the special resolution passed by way of postal ballot.

9. No Exemption in case of acquisition from other competing acquirer

10. Frequently Traded Shares

For determining the frequency of trading in shares, the trading turnover during the 12 months preceding the month in which the Public Announcement is made will be considered. Further, the volume of trading for frequently traded company increase from 5% to 10% to have a more realistic picture.

11. New Definitions Introduced

“Enterprise Value” means the value calculated as market capitalization of a company plus debt, minority interest and preferred shares, minus total cash and cash equivalents. 
“Volume weighted average market price” means the product of the number of equity shares traded on a stock exchange and the price of each equity share divided by the total number of equity shares traded on the stock exchange. 
“Volume weighted average price” means the product of the number of equity shares bought and price of each such equity share divided by the total number of equity shares bought. 
“Weighted average number of total shares” means the number of shares at the beginning of a period, adjusted for shares cancelled, bought back or issued during the aforesaid period, multiplied by a time-weighing factor. 

12. New Formats Introduced for PA, LOO, and Disclosures, Exemptions, Recommendation on the Open Offer by the Board of Directors and so on.

13. Detailed provisions for Voluntary Open Offer

The concept of voluntary open offer has been separately dealt in the SEBI (SAST) Regulations, 2011.In case of voluntary open offer, the offer size may be of 10% or more of the voting rights at the will of the Acquirer.

14. Detailed provisions relating to Indirect Acquisition:

The New Regulations prescribes detailed provisions relating to Indirect Acquisitions which is a welcome move as there was quite confusion. The New Regulations define the situations which will be deemed as Indirect Acquisition.

15. Recommendation on the Open Offer by the Board of Target Company

A recommendation on the offer by the Board of Target Company has been made mandatory and such recommendations shall be published at least two working days before the commencement of the tendering period in the same newspapers where the public announcement of the open offer was published, and simultaneously, a copy of the same shall be sent to SEBI, Stock Exchange and Manager to the Offer.

16. Revision in SEBI fees to be given while submitting the draft letter of offer

17. Provisions relating to Exemption from Open Offer has been modified

18. Other Consequential Amendments

Simultaneously with the amendment in SEBI (SAST) Regulations, 2011, the format of disclosure of shareholding as provided under Clause 35 of the Listing Agreement in respect of following has been replaced

        a. Statement showing holding of securities (including shares, warrants, convertible securities) of persons belonging to the category “Promoter and Promoter Group”, : 

        b. Statement showing holding of securities (including shares, warrants, convertible securities) of persons belonging to the category “Public” and holding more than 1% of the total number of shares; 

       c. Statement showing holding of securities (including shares, warrants, convertible securities) of persons (together with PAC) belonging to the category “Public” and holding more than 5% of the total number of shares of the company. 

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Tuesday, 7 February 2012

Development in Corporate Governance After Satyam Scam


The Satyam scandal has shocked India. It is being called India's Enron. Many in the financial circles are dismayed that the biggest-ever corporate fraud in the country could have escaped unnoticed for so many years. It has brought into question the levels of corporate governance in the country, and has cast an ugly shadow on the once shining image of Indian industry overseas. The National Stock Exchange has excluded Satyam, which has received several prominent awards for corporate governance in the past India has seen corporate scandals in the past, but never one of this magnitude. A software company, touted as a success story, the 4th largest software company in India and one that services around 1/3rd of the Fortune 500 companies, the events of the past one month have been a total shock. They have called into question the entire range of issues related to ethics, corporate governance, fiduciary responsibilities, professional auditing, and so on. 

The Satyam scandal highlights the importance of securities laws and corporate governance in emerging markets. Mounting evidence suggests that weak corporate governance slows economic development. There is a broad consensus that emerging market countries must strive to create a regulatory environment in their securities markets that fosters effective corporate governance. India has managed its transition into a global economy well, and although it suffers from corporate governance issues, it is not alone as both developed countries and emerging countries experience accounting and corporate governance scandals.


Corporate governance is important for economic development. Research shows that the ratio of stock market capitalization to GDP in countries that rank in the highest quartile for corporate governance is four times higher than stock markets that rank in the lowest quartile for corporate governance. Poor corporate governance significantly hampers the ability of businesses to raise capital and impedes economic growth. Effective corporate governance provides for more efficient allocation of resources, as the return on assets in countries with the highest levels of corporate governance is double that of the return on assets in countries with the lowest levels of corporate governance. India has been proactive throughout its past 20 years of economic liberalization in bringing regulations to help foster effective corporate governance that contributed to its economic growth.

India immediately portrayed the Satyam scandal as an aberration to try to salvage the remaining confidence in its capital markets. Several commentators, however, claimed that the scandal was not an aberration, but a sign of governance issues in India. 


After the Satyam scandal, investors and regulators called for strengthening the regulatory environment in the securities markets. In response to the scandal, the SEBI revised corporate governance requirements as well as financial reporting requirements for publicly traded corporations listed in the country. The SEBI also strengthened its commitment to the adoption of International Financial Accounting Reporting Standards. In addition, the Ministry of Corporate Affairs is devising a new Corporate Code and is considering changing the securities laws to make it easier for shareholders to bring class action lawsuits.

1. Governance Reform – Independent Directors

The Satyam scandal reinforced the Indian regulators' commitment to continue the process of corporate governance reform. Even before the Satyam scandal broke, India was in the process of updating its 1956 Companies Act, which sets out key Indian corporate governance rules. The SEBI is considering several proposals ranging from mandating increased due diligence on transactions to increasing personal liability of board members. If reform continues on its current course, reform within the 1956 Companies Act will make it easier for shareholders to sue officers and directors of corporations. The SEBI is also considering making publicly listed companies carry director and officer liability insurance to protect shareholders from damages. Additionally, the SEBI proposed creating a law that provides whistleblowers with protection for reporting fraudulent activity. Finally, the SEBI revised takeover regulations to increase disclosure in takeovers.

2. Disclosure of Pledged Securities

After Satyam, the SEBI increased disclosure obligations of promoters and controlling shareholders. Before the Satyam scandal, promoters[2]and controlling shareholders were not required to disclose to investors if they had pledged their stock. Pledging stock is the process whereby a person offers his or her stock to a bank or other institution as collateral for a loan. The problem with a controlling shareholder pledging stock is that once the stock drops below a certain level, the drop will trigger a margin call. After receiving a margin call, the person who pledged the stock must provide additional collateral. If the person cannot provide additional collateral, the lender will liquidate the stock that the person posted as collateral, potentially causing a significant decline in a company's stock price. This hurts minority shareholders who are unaware that the controlling shareholder had pledged his or her stock. Two weeks after Satyam's collapse, the SEBI made it mandatory for controlling shareholders to disclose any share pledges.

3. Increased Financial Accounting Disclosures

The SEBI also recently proposed requiring companies to disclose their balance sheet positions twice a year. Pre-Satyam, the regulations only required disclosure of balance sheet positions once a year. The increased reporting of companies' balance sheets will provide investors with more information on the stability of a company's financial position. The increased reporting requirements of balance sheets will probably eventually lead to the requirement that companies provide a statement of cash flow in its biannual reports as well. Increasing both the frequency and detail of disclosure will help provide for a more robust market check—e.g. investors will be able to police companies better and pay more attention to accounting irregularities. For example, increased frequency of disclosure of Satyam's balance sheet could have led to an investor discovering, and pressing the board to investigate, the claimed large cash deposits in non-interest bearing accounts more quickly.

4. IFRS (Adoption of International Standards)

Satyam strengthened India's commitment to adopting International Financial Reporting Standards ("IFRS") by 2011. Currently, Indian Generally Accepted Accounting Practices and the IFRS differ significantly. Globally, more and more countries are moving towards IFRS, as currently more than 100 countries require, permit, or are converting to IFRS. Adopting IFRS will facilitate investor comparisons of financial performance across country lines and will increase confidence in the accounting numbers.

5. Creation of New Corporate Code - Ministry of Corporate Affairs

In addition to the new SEBI regulatory requirements, the Indian Ministry of Corporate Affairs is drafting a new corporate code for Indian publicly listed companies. Adherence to the Code will be voluntary; however, every company that deviates from the code's requirements must disclose the deviations to the ministry. The Ministry of Corporate Affairs anticipates that the new code will impose more stringent disclosure obligations than the SEBI currently requires.
The Ministry of Corporate Affairs recently proposed a new law that would make it easier for Indian investors to form class action lawsuits against fraudulent actors in the company. Indian Corporate Affairs Minister, Salman Khushid, stated that he envisioned drafting the law to provide investors with a claim similar to the shareholder derivative suit[3] that U.S. law permits. Indian law currently creates obstacles to investors filing class action lawsuits. The Ministry of Corporate Affairs hopes that this new law will provide Indian citizens with the confidence to invest in the financial markets.