Global investors landing on Indian shores and Indian companies coming out with initial public offerings have underscored the need for better governance standards in companies.

In 2021, 63 companies raised a whopping sum of ₹1.2-lakh crore through IPOs. Listed companies are expected to be transparent, adopt the best practices of corporate governance and the market regulator, Securities Exchange Board of India (SEBI), is expected to play the watchdog role.

SEBI has rules, regulations and guidelines on aspects such as related party transactions, listing obligations and disclosure requirements, code of conduct, prevention of fraudulent practices and unfair trade practices, and prohibition of insider trading.

With increased public participation and enthusiasm in the securities market, the need has arisen to increase the bite power of regulatory bodies like SEBI and tighten the regulatory scrutiny of stock exchanges in India.

In UP Stock Exchange Brokers Association Vs SEBI, the Allahabad High Court observed that the stock exchanges are the nucleus of the capital allocation system and any failure of such institutions could lead to cataclysmic collapses that may potentially result in an economic downfall extending beyond the securities markets in India.

Passive regulatory oversight

The tendency of SEBI to incline towards passive regulatory oversight or the ‘soft law’ approach of making legal compliance voluntary poses a great risk especially with many foreign investors entering the Indian market.

In February 2022, SEBI passed the final order in the National Stock Exchange of India (NSE) scam – a matter which highlights the need to introduce a regulatory overhaul in corporate governance norms and the operations of stock exchanges in India. In December 2015, SEBI received a whistle-blower complaint which accused Chitra Ramkrishna, the then MD and CEO of NSE, of several corporate governance transgressions.

During the investigation, SEBI found that the erstwhile MD and CEO had shared classified information of NSE with an unknown person. When SEBI delved deep into the matter, it was revealed by Ramkrishna that she was being guided by a mysterious “yogi” (mystic) in taking key business decisions of NSE.

The investigations revealed that at the time of being elevated as the MD and CEO, Ramkrishna redesignated Anand Subramanian as her advisor and the Group Operating Officer (GOO). Interestingly, Subramanian was offered exponentially high compensation and perks which were unheard of within the NSE and even the industry in general. As per SEBI’s findings, there were no records available for Subramanian’s employment at NSE.

It was contended by a whistle-blower that despite all such powers and privileges, Subramanian was never designated as a Key Management Personnel (KMP) under the Securities Contracts (Regulations) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC Regulations 2012).

Under the SECC Regulations 2012, a KMP includes a senior executive person who stands high in the hierarchy of the department. Regulation 26 empowers SEBI to take appropriate action (including termination of appointment) on the failure of directors to comply with the said law.

A new set of SECC Regulations were introduced in 2018 which provided that any action taken under the SECC Regulations 2012 would be deemed to have been undertaken as per the revised regulations. On the issue of the identity of the “mystic”, the CBI recently confirmed that Subramanian was indeed masquerading as the mystic.

In February 2022, Subramanian was arrested by the CBI for not cooperating in the matter. After investigating the matter, SEBI concluded that Ramkrishna, Subramanian, and several other officials of NSE were guilty and liable for imposition of penalty. It was observed that the compensation paid to Subramanian at NSE remained arbitrary and disproportionate throughout which amounted to financial misdeed on part of Ramkrishna.

A penalty of ₹3 crore was imposed on Ramkrishna while a penalty of ₹2 crore was imposed on Subramanian. Additionally, both Ramkrishna and Subramanian were restrained from associating with any market infrastructure institution or intermediary registered with SEBI for 3 years from the date of the order. NSE was also directed to pay a penalty of ₹2 crore and refrain from launching a new product for six months from the date of the SEBI order.

Ensure investors’ interests

India has witnessed many cases involving corporate governance issues spanning from the Satyam computers scam from the past decade to the recent ABG shipyard case. The lessons from these scams are exhaustive though the course correction of the Indian corporate governance regime appears to be minuscule.

The influx of investor interest and increased adoption of the professionally-run model makes it important to rehaul the corporate governance law framework.

A fine balance must be maintained to ensure investors’ interests are met while the companies operate within the four walls of business ethics, shareholders’ interests, corporate transparency, and principles of corporate governance.

The authors are advocates at Phoenix Legal, a law firm