Ensuring Appropriate Government Legislation
Over the past 25 years, regulators in India have worked diligently to establish robust systems of governance for their regulated entities. The Securities and Exchange Board of India (Sebi) has taken the lead in corporate governance for listed companies, while the Reserve Bank of India (RBI) has benefited from expert committees on banking and Non-Banking Financial Company (NBFC) reforms.
Recently, Sebi has issued a consultation paper on Strengthening Governance of Market Infrastructure Institutions (MIIs), aiming to enhance the accountability of MII officers and improve governance standards of critical operations, regulatory compliance, risk management, and investor grievances. The new proposals also focus on enhancing the governance of MIIs' regulatory, compliance, risk management, and investor grievances.
However, despite these progressive standards, governance issues persist in MIIs, listed banking companies, and NBFCs, despite supervision by Sebi and the RBI. One of the challenges in implementing exalted models of corporate governance stems from the tension between idealistic governance frameworks and practical realities of political, economic, and social environments.
To temper regulatory expectations and achieve better results, regulators can adopt pragmatic, context-sensitive approaches, emphasize incremental reforms and experimentation, balance governance vigour and protection of rights, set realistic goals and performance metrics, and encourage stakeholder engagement.
Moreover, the RBI is planning to intensify its monitoring of bank board proceedings, focusing on the quality of discussions, contributions of board committees, and mismatch between recorded discussions and minutes. The Mahalingam Committee's recommendations in 2022 have reinforced these recommendations.
Eminent philosopher directors on boards of companies have contributed to elevated norms on corporate governance through their writings. The PJ Nayak Committee (2014) was mandated to focus on the governance of bank boards, particularly public sector banks.
Despite these efforts, the principle of "giving voice to values" by independent directors has been compromised. Elaborate regulations relating to the composition of boards, number of board committees, enhanced role of independent directors, and improving disclosures have been developed by various committees for listed companies.
Regulators should clearly demarcate the regulatory role and accountability of MIIs as per the relevant parent Acts. They should also temper their expectations from a principal-agent model and differentiate between financial crimes and lesser civil violations. Regulators could consider rewarding well-governed entities, similar to the IPL fair play awards, to encourage good governance practices.
In sum, the key to effective corporate governance regulation is managing expectations by blending ideals with pragmatism, allowing flexible adaptation to complex realities rather than imposing rigid exalted models that may cause unintended consequences or resistance. This approach facilitates sustainable improvement and stability in governance systems.
- Sebi has issued a consultation paper to strengthen the governance of Market Infrastructure Institutions (MIIs), focusing on accountability, governance standards, and regulatory compliance.
- Regulators like Sebi and the Reserve Bank of India (RBI) face challenges in implementing idealistic corporate governance frameworks due to political, economic, and social environment complexities.
- RBI plans to intensify its monitoring of bank board proceedings, focusing on discussions' quality, board committees' contributions, and the alignment of both.
- To encourage good governance practices, regulators could consider rewarding well-governed entities, similar to the IPL fair play awards, encouraging sustainability in governance systems.
