SEBI: Ethics in Corporate Governance

Corporate governance lies at the heart of the way businesses are run. It’s the ‘way businesses are directed and controlled’, it concerns the work of the board
as the body which bears ultimate responsibility for the business. Governance
relates to how the board is constituted and how it performs its role. It encompasses issues of board composition and structure, the board’s remit and
how it carried out and the framework of the board’s accountability to its
stakeholders. It also concerns how the board delegates authority to manage
the business throughout the organization. The word ‘Corporate Governance
(CG) has become a buzzword these days due to various corporate failures
world over in recent past. The Corporate Governance represents the value
framework, the ethical framework and the moral framework under which
business decisions are taken. In other words, when investment takes place
across national borders, the investors want to be sure that not only their
capital handled effectively and adds to the creation of wealth, but the business
decisions are also taken in a manner which is not illegal or does not involve
moral hazards. The Corporate Governance basically denoted the rule of law, transparency, accountability and protection of public interest in the management of a company’s affairs in the prevailing global and competitive market milieu. It called for an enlightened investing community and strict regulatory regimes to protect the rights of the investors and companies to improve productivity and profitability without recourse to any means which would offend the moral, ethical and regulatory framework of business. So in India these responsibilities lies on SEBI – The Securities and Exchange Board of India.

The Securities and Exchange Board of India owned by the Government of India
was established on 12th April 1992 under the Securities and Exchange Board of India Act, 1992 to protect the interests of the investors in securities along with promoting and regulating the securities market. Headquartered in Mumbai, the Securities and Exchange Board of India (SEBI) has four regional offices located in Ahmedabad, Chennai, Delhi and Kolkata. SEBI was initially formed in the year 1988 as a non-statutory body for the regulation of the securities market and later acquired statutory status on 30th January 1992.

SEBI is one of the most trusted in the world. However, things haven’t always
been this way. Back in the ’80s, everyone was trying to find loopholes in the
system and get rich through fraudulent schemes. Today, this market is tightly regulated by the Securities and Exchange Board of India, whose role is to
prohibit unfair trade practices and protect investors’ interests, among other
functions.
Soon, it has emerged as the regulator of stock markets in India, overseeing the
activities of investors, securities issuers and market intermediaries. SEBI is also
responsible for carrying out investor awareness and training programs and
regulating major transactions. Furthermore, it monitors credit rating agencies,
custodians, bankers, brokers and other financial market players.

Several departments exist within SEBI, including but not limited to the
Corporation Finance Department (CFD), the Legal Affairs Department, the
Market Regulation Department and the Office of International Affairs. The
CFD, for example, oversees all matters related to corporate governance and
accounting standards. The Office of Investor Assistance and Education (OIAE),
on the other hand, handles investors’ complaints, such as those related to the
transfer of shares.

Organisation Structure

The SEBI is a body corporate. Under section 4 of the SEBI Act, Its general superintendence, direction and management are entrusted with the Board of Directors which can exercise the power of SEBI.

The Board Consists of:

  1. A Chairman appointed by the Government.
  2. Two members from the officials of the Ministry of Government of India dealing with Finance and administration of the companies appointed by the Government.
  3. One member from the officials of, and nominated by the RBI.
  4. Five members of whom at least two should be whole time members nominated by the Government.

The Chairman and other members of SEBI should be people of ability, integrity and standing who have the capacity to deal with problems related to the securities market or have special knowledge and experience of law, finance, economics, accountancy, administration or any discipline which, in the opinion of the Government, would be useful to SEBI. It has its head office in Mumbai and regional offices at Delhi, Kolkata and Chennai.

SEBI Guidelines for Corporate Governance

Corporate governance encompasses the mechanisms, rules and practices by which companies are operated and controlled. It aims to mitigate conflicts of interest between shareholders and promote ethical decision-making, transparency and integrity at the executive level. Corporate governance in India is a collection of internal controls, policies, and procedures that form the basis of an organization’s activities and its relationships with various stakeholders, such as clients, management, staff, government, and industry bodies. Such ethical corporate governance initiatives should provide a basis for upholding the values of accountability, fairness, ethics, and honesty. The need of Corporate Governance in India is because it is an essential determinant of industrial effectiveness and competitiveness. There are many questions posed today about the way an organization is regulated. Enhanced organizational efficiency and improved economic outcomes are assured by better governance. Corporate governance in India lays the framework for its actions, resource management, creativity in products/services, and overall corporate strategies. The role of SEBI in corporate governance is to ensure these rules are implemented and followed by all parties.

For example, the organization ensures that companies issuing securities use
fair practices and disclose relevant information to the shareholders. It also
regulates takeovers, listing agreements of stock exchanges, corporate
restructurings and more. SEBI guidelines for corporate governance are
designed to provide a safe, transparent environment for investors and prohibit
fraudulent or unfair practices, like insider trading.

The role of SEBI in ensuring ethical standards among corporations became
even more important in 2018 when the organization imposed additional
compliance conditions. For instance, big firms will be required to have at least
one-woman independent director and separate chairpersons and CEOs.
Furthermore, listed companies must disclose related-party transactions and
hold a specific number of annual general meetings. SEBI initiatives in corporate governance are largely based on the recommendations made by the Kotak
committee
in March 2018 and aim to enhance transparency.

Functions of SEBI

The functions of SEBI can be divided into three parts:

  1. Protective Function
  2. Regulatory Function
  3. Development Function

1. Protective Function: The protective function implies the role that SEBI plays in protecting the investor interest and also that of other financial participants.
The protective function includes the following activities.

a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the insiders of a company, which includes the directors, employees and promoters. To prevent such trading SEBI has barred the companies to purchase their own shares from the secondary market.

b. Check price rigging: Price rigging is the act of causing unnatural fluctuations
in the price of securities by either increasing or decreasing the market price of
the stocks that leads to unexpected losses for the investors. SEBI maintains
strict watch in order to prevent such malpractices.

c. Promoting fair practices: SEBI promotes fair trade practice and works
towards prohibiting fraudulent activities related to trading of securities.

d. Financial education provider: SEBI educates the investors by conducting
online and offline sessions that provide information related to market insights
and also on money management.

2. Regulatory Function: Regulatory functions involve establishment of rules and regulations for the financial intermediaries along with corporates that helps in efficient management of the market. It has the role to ensure that corporations and financial intermediaries alike follow its guidelines and code of conduct. The end goal is to keep the financial market running smoothly.
The following are some of the regulatory functions.

(a) Registration of Brokers and Agents: It registers brokers, sub-brokers, transfers agents, merchant banks and other intermediaries.

(b) Notifications of Rules and Regulations: It notifies rules and regulations for smooth functions of all intermediaries in the securities’ market.

(c) Levying of Fees: It levies fees, penalties and other charges for contravening its directions and orders.

(d) Regulator of Investment Schemes: It registers and regulates collective investment schemes and mutual funds.

(e) Prohibits Unfair Practices: SEBI promotes fair trade practice and works
towards prohibiting fraudulent activities related to trading of securities.

(f) Inspection and Inquiries: It undertakes inspection and conducts inquiries and audit of stock exchange.

(g) Performing and Exercising Powers: It exercises such powers under Securities Contracts (Regulations) Act 1956 as delegated to it by the government of India.

3. Developmental Function: Developmental function refers to the steps taken by SEBI in order to provide the investors with a knowledge of the trading and
market functions. The developmental functions of SEBI aim to promote computerized trading and modernize the market infrastructure. These initiatives have led to a reduction in fraud and unfair practices. For example,
the organization requires companies that buy or sell stocks to register for a
dematerialization (Demat) account online, which helps reduce bureaucracy
and simplifies the process of holding investments. The Demat system allows
traders to work from anywhere and mitigates the risks associated with paper
shares, such as trading delays or thefts. It also publishes information useful to all market participants for conducting research.

Ethics is the first line of defence against corruption while law enforcement id remedial and reactive. Good corporate governance goes beyond rules and regulations that the government can put in place. It is also about ethics and the values which drive companies in the conduct of their business. It is therefore all about the trust that is established over time between companies and their different stakeholders. Good corporate governance practice cannot guarantee any corporate failure. But the absence of such governance standards will definitely lead to questionable practices and corporate failures which surface suddenly and massively. In making ethics work in an organization it is important that there is synergy between vision statements, mission statements, core values, general business principles and code of conduct confers a variety of benefits. An effective ethics programme requires continual reinforcement of strong values. Organizations are challenged with how to make its employees live and imbibe the organization codes and values. To ensure the right ethical climate a right combination of spirit and structure is required.

Notes and References

  1. Arora, Ramesh k. (ed). Ethics, Integrity and Values in Public Service. New Delhi: New Age International, 2014.
  2. https://bizfluent.com/facts-7609058-role-sebi-corporate-governance.html
  3. https://byjus.com/commerce/sebi-objectives-and-functions/
  4. https://darpg.gov.in/sites/default/files/ethics4.pdf
  5. https://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India
  6. https://www.sebi.gov.in/legal/circulars/feb-2000/corporate-governance_17930.html
  7. https://www.ripublication.com/gjmbs_spl/gjmbsv3n10_08.pdf
  8. https://www.trcconsulting.org/blog/what-is-the-sebi-code-of-corporate-governance-in-india

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