India’s Corporate Governance Framework: The Regulator’s Role

In India, various types of regulatory bodies exist. There are Statutory bodies, which are separate from the Executive wing of the Government, and enjoy a certain degree of autonomy. Then there are Regulatory bodies, which are created through Government notification. There are also the Self-Regulatory bodies, also called Self-Regulatory Organisations or SROs, which are created under different laws, but are self-regulatory in nature.

Regulators play an important role in ensuring that companies function in a proper manner, and that interests of all stakeholders are safeguarded. Regulators lay down regulations, which impose reasonable restrictions or limitations on corporate entities to not undertake activities that would not be in the interest of their stakeholders. At the same time, it is reasonable to expect Regulators to review these regulations from time to time, to ensure that they continue to stay relevant, and do not stand in the way of the ease of doing business.

In the last few years, corporate India has witnessed several regulatory and structural reforms in the area of corporate governance, which have been introduced through various regulatory bodies.

1. Ministry of Corporate Affairs (MCA)

MCA regulates companies, whether public or private, through the Companies Act, 2013 (the Act) and the Rules made thereunder. With the intent of promoting corporate governance, the Companies Act, 1956 was replaced with the Companies Act, 2013. A number of new provisions were introduced, such as appointment of at least one woman Director on the Board, concept of Key Managerial Personnel, provision for Board evaluation, provision of separate meeting of Independent Directors, provision to streamline Board and committee meeting agenda documents through Secretarial Standards-1, provisions to streamline AGM related processes through Secretarial Standards-2, introduction of National Company Law Tribunal (NCLT), and provision of filing of class action suit. Some of these provisions were introduced for the first time in India. There was also the introduction of bodies such as NFRA, for proper independent supervision over Statutory Auditors, and SFIO, a multi-disciplinary statutory agency to detect and prosecute white-collar crimes. In its endeavour to promote ease of doing business, MCA has continuously made efforts to decriminalise a number of offences under the Act.

2. Securities and Exchange Board of India (SEBI)

SEBI regulates all listed companies through SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). LODR replaced the erstwhile Clause 49 of the Listing Agreement. It introduced a number of provisions to promote corporate governance such as presence of at least one woman Independent Director, majority independent members on Audit Committee and Nomination and Remuneration Committee, introduction of a Risk Management Committee, provision for Senior Management Personnel (in addition to KMPs), more disclosures both on Stock Exchanges and on the website of the company, and provisions relating to Related Party Transactions. Over time, SEBI has continuously brought amendments to LODR in order to promote transparency and to prevent misdoings in the corporate world.

3. Reserve Bank of Indian (RBI)

Banks in India are regulated by the RBI through the Banking Regulation Act, 1949 and the guidelines and circulars issued from time to time. RBI continuously takes steps to keep the banking operations safe and smooth. The nature of banking activities is such that risk is an integral part of it. Banks have been the first to have mandatory positions such as that of Chief Risk Officer (CRO). In addition, the CRO has to meet the Risk Management Committee members, without the presence of management, so that he/she has adequate independence in functioning. With a rise in cyber risks, RBI has also mandated the creation of a committee to specifically look at cyber risk. The number of Board committees too are more than those for other listed.

4. Insurance Regulatory and Development Authority of India (IRDAI)

IRDAI deals with insurance companies in India. It ensures that insurance companies adhere to regulations, and protect interests of their policyholders. IRDAI has become active in the space of corporate governance, and has come out with guidelines on the same. Consumer protection is one of the key areas of concern for IRDAI. It ensures that policyholders do not get cheated by service providers.

5. Pension Fund Regulatory and Development Authority (PFRDA)

PFRDA regulates the pension sector in India. It promotes old age income security by establishing, developing and regulating pension funds, and protecting the interests of subscribers to schemes of pension funds. It also ensures the orderly growth and development of the pension market.

From time to time, Regulators introduce amendments, which are in response to the changing business environment. All Regulators continue to contribute towards the strengthening of corporate governance practices in India, to ensure that corporates can be held accountable, while they carry out their operations transparently.

Some suggestions on what more can be done by Regulators to improve the governance landscape are –

• They should address the issue of excessive regulations and kneejerk reactions to a singly episode of mischief.
• Regulations should not adversely impact the day-to-day business activities, and should not be business destroying.
• There should be a regulatory impact assessment conducted from time to time, which will help Regulatory bodies to analyse whether the proposed regulation serves public interest.
• All regulations should have sunset clauses to examine their continuing relevance some years after their coming into effect to see whether they remain relevant or not. At the same time, there should be a Regulations Review Authority to weed out existing regulations that are not relevant, in the absence of a sunset clause in such regulations.
• Regulators should be mindful of the cost of compliance.
• There is a need for greater dialogue with industry participants.
• SROs are mostly industry bodies or membership bodies, which have the power to regulate. It is important to ensure that the business function and the regulatory function are kept separate, to ensure independence of the regulatory element.

The role of regulatory bodies is to have meaningful and pragmatic regulations, to promote ease of doing business, and not to increase the compliance burden.