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 (