It is essential for companies to have a sound Corporate Governance structure, and processes related thereto, to function effectively, responsibly and ethically. This promotes transparency, accountability, and fairness.

Regulators play an important role in ensuring that companies function in a proper manner, such that interests of all stakeholders are protected. It is the role of the Regulators to lay down regulations. These would impose restrictions or limitations on corporate entities to not undertake activities that would not be in the interest of stakeholders. Regulators must also 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.

There are various types of Regulatory bodies that 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 known as Self Regulatory Organisations or SROs), which are created under different laws, but are self-regulatory in nature.

Corporate India has witnessed several regulatory and structural reforms in the area of Corporate Governance in the last few years. These 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. There is a major emphasis to promote governance in companies with the Companies Act, 1956 being 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 KMP, provisions for Board evaluation, provision of separate meeting of Independent Directors, concept of Corporate Social Responsibility (CSR), where all profit-making companies have to spend at least 2% of the average net profit towards social development activities, provisions 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 for the first time in India. There was also the introduction of bodies such as NFRA and SFIO. NFRA was introduced to ensure that there is proper independent supervision over Statutory Auditors. SFIO, a multi-disciplinary statutory agency, was introduced to detect and prosecute white-collar crimes.

MCA has continuously made efforts to decriminalise a number of offences under the Act in order to promote the ease of doing business.

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 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), requirements relating to disclosures both on Stock Exchanges and on the website of the companies, provisions relating to RPTs, and provision of secretarial audit for companies and their material unlisted subsidiaries.

SEBI has continuously brought amendments to LODR in order to promote transparency and to prevent misdoings in the corporate world. The latest changes include provision for a Compliance Officer to be a KMP and one level below the Board, enhanced governance related disclosures on Stock Exchanges, and reduction of timeline for disclosures, in order to promote transparency in the markets.

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. 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. It has been the first Regulator that has put in retirement age for Directors at 75 years.

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.

All Regulators have contributed, and continue to, contribute, towards the strengthening of Corporate Governance practices in India, to ensure that there is accountability and transparency by corporates. From time to time, they introduce amendments, in response to the changing business environment, and to address issues and concerns relating to the conduct of business.

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

• Address the issue of excessive regulations and kneejerk reactions to mischief – A single episode of mischief in the market should not automatically lead to introduction of a new law/ regulation. There is a need to have better implementation, and not an increase in regulations, as knee jerk reactions.
• Regulations should not adversely impact the day-to-day business activities – Regulations are means to an end, not an end in themselves. There is a need to have proper check and balances, such that regulations do not become business destroying.
• Regulatory impact assessment – 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.
• Sunset clauses – 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.
• Cost of implementation – Regulators should be mindful of the cost of compliance. The cost, in every case, is passed on to the persons for whose benefit the regulation is written.
• Dialogue with industry participants – There is a need for greater dialogue with industry participants. There is also a need for adherence to relevant international standards. Proper harmonisation of regulations would help in raising the standards of Corporate Governance.
• 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, and not to increase the compliance burden or cost element for the corporates.

Prerna Mohan