Listless lessons on corporate governance thru listing norms
K. Srinivasan

K. Srinivasan comments on the new Clause 49 of the Listing Agreement

THE object of the Securities (Contracts) Regulation Act, 1956, as explained in the Statement of Objects and Reasons, is to provide for the regulation of stock exchanges and of transactions in securities in the exchanges with a view to preventing undesirable speculations in them.

The corporatisation of the exchanges, through the Securities Laws (Amendment), Act, 2004 will facilitate and streamline the regulatory process.

The listing agreement which sets out the conditions to which all applicants for listing have to conform should obviously subserve the purpose for which the stock exchanges have themselves been organised, viz. regulation of the trading in the listed company's securities through them.

The new Clause 49 of the Listing Agreement betrays the Finance Ministry's notion that it can utilise these rules to standardise `corporate governance', enforce a code of conduct and regulate even the business of the company, issuing shares and securities which are to be bought or sold on a recognised stock exchange.

`Agreement', a misnomer for `rules'

In the first place, there should be no doubt about the real status and function of a stock exchange. It has so far been giving the public the impression of being no more than a puppet show, with brokers and big companies, who engage its services, dominating it and manipulating it from behind the scene.

As the layman sees it, it is notamenable to any discipline, and is moved more by `sentiments' and the perceptions of those who run it or are able to influence and exploit it to their advantage than by the inherent value of the securities transacted.

It is up to some tantrum or the other on the slightest provocation and gets away with it on the pretext of `market volatility'.

According to newspaper reports, the new chief of the Securities and Exchange Board of India (SEBI), Mr M. Damodaran, while on a visit to Nasdaq, stated that he had asked the stock exchanges to furnish him with trading data to enable him find out whether there had been any market manipulation on Friday (April 15) when the Sensex crashed by over 219 points and wiped out crores of investors' wealth.

It would also appear that the regulator had slapped show-cause notices on 12 entities for alleged price manipulation that had led to the market crash in 2004.

Mr. Damodaran who added that not all of them responded to his show-cause notices and that the SEBI might have to consider appropriate "remedial and corrective measures", evidently reckons without the Securities Appellate Tribunal which, like Sindbad's Old Man of the Sea, has been sitting pretty on SEBI's back, not satisfied with anything that SEBI has done during the last few years, if its orders under sub-section (4) of Section 15T of the Securities and Exchange Board of India Act, 1992 (SEBI Act) are any indication.

One wonders whether it will not be better for SEBI to set its own house in order before it undertakes to teach `corporate governance' to those whose attitude and behaviour on the exchanges do not lend themselves to correction or enforcement of norms which are recognised as essential in public interest.

If SEBI cannot ensure predictable, rational behaviour of the exchanges, is it not presumptuous for them to venture into regulation of corporate business, which is as varied as it is extensive and in which only the fittest survive? Corporate governance is outside the ambit of a statute concerned with only orderly trading on the bourse. Listed companies can legitimately urge that the physician should cure himself first before he yields to the temptation to trespass into an area where the angels fear to tread.

Entities bound by the listing conditions?

Clause 49 of the listing rules is inapplicable to companies that are not listed. All public companies which are not listed, closely held private companies, Section 25 companies, all businesses run by individuals, partnership concerns, mutual funds, and so on, are outside its purview.

It will apply to private and public sector banks, financial institutions, insurance companies, and so on, incorporated under statutes other than the Companies Act, 1956, to the extent that it does not violate the respective statutes and guidelines or directives issued by the relevant regulatory authorities.

If the intention is that the tenets and procedures, evolved by successive committees constituted by various authorities in and outside India, should be adopted to the extent possible, the Government should have had all the issues and all the solutions suggested by them considered and implemented together. Studies are initiated with reference to specific difficulties that come to notice. They tend, therefore, to be problem-centric.

The problems of corporate businesses are many; and they cover diverse areas such as leadership, management, finance, accounts, audit, labour and so on. Accounts and accountability get emphasised in most of the reports because they have been neglected in the past. But the extent of emphasis is to such extent that the proposed solutions are self-defeating and incongruous.

The audit committee and the independent director have thus emerged dominant, overshadowing the others. The risk of initiative being discouraged, competition being impeded and thwarted, and independent directors who have no personal stake in the business following the line of least resistance cannot be ruled out with the kind of regime that has been held up as a role model, dictated by considerations of prudence and safety. There is a possibility of directors playing safe if their tenure is limited to four or five years.

This matter warrants comprehensive discussion before appropriate legislative action is taken on it.

This is not something which can be stipulated in the listing `agreement' of a stock exchange which involves only particular classes or categories of companies seeking to raise capital in the market or have their shares/securities traded in the market.

Even if it is proposed to confine the remedial measures that have been devised only to companies which raise the capital they need from the public, the Securities Contracts (Regulation) Ac, the Companies Act or the SEBI Act should be amended to require that all companies which are interested in going to the public at large for their equity or borrowed capital should modify their byelaws suitably on the required lines to qualify for getting public funds. All new companies with issued capital exceeding the prescribed limits can be compelled to follow a model memorandum and articles as also model byelaws to be eligible to raise capital from the public.

Such a straightforward course is preferable to indirect pressure through the `Listing Conditions', which are likely to lead to protracted litigation. (By arrangement with Corporate Law Adviser, New Delhi.)