Professional Documents
Culture Documents
of Corporate
Governance
inIndia
Gatekeepers of Corporate Governance
Securities and Exchange Board of India
(SEBI)
Authors: Kshama V Kaushik
Rewa P Kamboj
Table of Contents
Executive Summary............................................................................................................................. 1
Literature Review................................................................................................................................. 3
1.
Introduction............................................................................................................................. 6
2.
3.
4.
Annexure I SEBI.............................................................................................................................. 41
Annexure II SEBI............................................................................................................................. 42
Executive Summary
This section analyses the role of perhaps the most important regulator of the capital market
and the corporate world in India, the Securities Exchange Board of India (SEBI).
We begin with the evolution of SEBI as a regulator and trace its growth through various
phases. We briefly discuss the regulatory framework of SEBI and the broad contours of the
mechanism of corporate governance it has devised.
The methodology used is:
a. We have analysed data from National Stock Exchange of company-wise submissions
with respect to compliance with provisions of corporate governance code for the
th
quarter ended 30 June 2011 and found that over 70% of companies are adhering to
the corporate governance norms. However, this analysis is limited to only examine
whether companies had declared adherence to prescribed corporate governance
mechanisms and did not cover examining the quality of such mechanisms or the
benefit of such mechanisms for individual companies
b. We have analysed the effect of adoption of corporate governance norms mandated
by SEBI on 100 companies forming part of BSE 100 index over a period of seven (7)
years since they were introduced in 2005, that is, an analysis of around 800 financial
statements. We have used the established statistical tool of Tobins Quotient to
examine effectiveness of Clause 49. We have relied on financial evaluation tools
including important financial ratios to examine whether the barometer of financial
performance displays trends that indicate effectiveness of Clause 49. Finally, we corelated these ratios to study their inter-relationships and co relationships. The
analysis indicates a causality between improvement ofcorporate governance
processes following the introduction oftt Clause 49 in India. However, we could not
create a co relation between improved corporate governance and sustained
corporate performance.
c. We have analysed SAT orders passed in case of 100 appeals and the corresponding
100 Adjudicating Officer (AO)/ SEBI orders passed to ascertain the effectiveness of
the adjudicating and appellate process. Our analysis shows that the investigation and
appeals process tends to be slow, often arbitrary, due to higher discretionary powers
and at times opaque. Often the fines are very small compared to the extent of
alleged offences and the rules of disgorgement of profits by the perpetrators rarely
followed, creating no punitive action or dis-incentivising inappropriate business
conduct. While the inherent spirit of framework is robust and in line with best
practices of bringing in timely justice and fair play, its implementation needs to be
more effective for capital markets to be buoyant and transparent.
d. We have analysed consent orders to determine the efficacy of the entire process and
found that while the system of consent orders may be effective for settling cases, it
lacks transparency and is marred with opacity in many areas. We also noticed that
the Adjudicating Officer is very powerful in the entire process by playing a significant
role in the issue of show cause notices, enquiry, forwarding the case for settlement
and approving authority in consent orders which calls for greater transparency and
clearer guidelines.
We conclude that SEBI has played a big role in instituting a basic standard of corporate
governance in the country, albeit only for listed companies. These measures have reduced
information asymmetry and improved market liquidity; however, how much these measures
have helped in improving corporate performancea real barometer of effectivenessis not
evident.
Literature Review
Gatekeepers are individuals, institutions or agencies that are interposed between investors
and managers/owners in order to play a watchdog role to reduce agency costs. If
gatekeepers are absent or do their job inefficiently then, it is reasonable to believe, there will
be fewer checks on managers/owners to behave in a manner consistent with placing
investors interests above self-interest. In other words, market efficiency will be lower which,
in turn, would raise the cost of capital.
Kraakman (1986) defines gatekeepers as parties who are in a position to prevent
1
misconduct by others by withholding their co-operation.
Scholars like Kraakman and Coffee further define gatekeepers as reputational intermediaries
who provide verification and certification services to investors. But they also acknowledge
that the role of gatekeepers as reputational intermediaries who can more easily be deterred
than the principals they serve has been developed in theory but less often examined in
2
practice .
Gatekeepers essentially assess or vouch for corporate clients own statements or a specific
transactionif this sounds like duplication, it is; however, this duplication is necessary
because it is generally accepted that a gatekeeper has a lesser incentive to lie than the
3
client andregards the gatekeepers word as being more credible .
Hamdani defines gatekeepers as parties who sell a product or provide a service that is
4
necessary for clients wishing to enter a particular market or engage in certain activities .
Therefore, bankers, auditors and analysts are gatekeepers for clients wishing to enter the
capital market. Extending the argument, for clients who wish to raise money through shares,
the capital market regulator (Securities Exchange Board of India) is a major gatekeeper.
Lending to the corporate sector is one of the main planks of a commercial bank; therefore,
the banking sector regulator (Reserve Bank of India) is another gatekeeper to ensure
corporate governance through the regulatory mechanism of prudential lending norms and
monitoring use of money, among other things.
Having a network or series of gatekeepers is, however, no guarantee that corporate
wrongdoing will be detected or avoided. In a wave of corporate scandals starting from Enron,
we have seen instances of multiple gatekeeping failure in which wrongdoing went
undetected through several layers. The failure of this network of gatekeepers was a
recurring theme in business scandals. In too many instances, the gatekeepers in pursuit of
available at SSRN:http://ssrn.com/abstract=466040
their own financial self-interest compromised the values and standards of their profession in
the recent round of corporate scandals, the first tierthe managersfailed and then the
5
gatekeepers failed as well.
In fact, some scholars believe that, theoretically at least, the services of gatekeepers can be
6
performed either from within or outside the corporation . Of course the law mandates that
certain gatekeepers must be external to the organization such as auditors but there are other
gatekeepers like lawyers or internal auditors who may serve their function just as effectively
if they worked from within the corporation.
Accountability of a gatekeeper requires a certain quantum of liability s/he must bear. As far
as individual gatekeepers are concerned (such as auditors, lawyers, etc.), every country has
some rules to punish errant behaviour. However, there are few (if any) instances of
accountability of gatekeepers who are institutions; for instances, if SEBI or RBI fails to detect
or deter abuse of governance norms by companies or banks, the investor has little recourse
to hold them accountable. Gatekeepers liability may not always be created for the
gatekeepers own waysalthough this is also a possibilitybut for the wrongs attributed to
the corporation that could have been deterred or at least minimised by precautions taken by
gatekeepers.
Andrew Tuchs study shows that incentive problems will arise if gatekeepers are not capable
of bearing the full liability imposed on them. In other words, gatekeepers incentives to take
7
precautions are diluted where they are protected from full liability arising from their activities
A similar assertion is made by Steven Shavell in an optimal deterrence theory which
prescribes the legal rules that optimally deter socially harmful conduct and discusses the
8
dilution of incentives arising from a wrongdoers inability to pay for the losses it causes .
A gatekeeper may even be shielded from the full effects of a liability regime by insolvency,
although it rarely occurs in practice (Arthur Anderson being a notable example). Some
categories of gatekeepers may collaborate with each other to adopt risk-shifting
arrangements; for example, comfort letters exchanged among bankers, analysts, auditors,
etc. Likewise, communications among regulators (such as between SEBI and RBI) may also
be termed as risk-shifting or risk-sharing arrangements. The objective of such an exercise
may be variedallocating liability or getting additional knowledge of the clients affairs or
information exchange.
Corporate conduct is overseen by multiple gatekeepers who act on different aspects of
business transactions. This ought to lead to an interlocking web of protection against
wrongdoing by all gatekeepers, calling into question the conception of the gatekeeper as a
9
unitary actor
Gatekeepers operate in an interdependent rather than independent manner and it is
important to have a certain degree of collective responsibility among all gatekeepers to
harness the total capacity to deter wrongdoing. A regime of fault-based liability coupled with
10
joint and several liability would be optimal for advancing the cause of optimal deterrence .
Multiple Gatekeepers, Andrew F.Tuch, Discussion paper no.33, 3/2010, Harvard Law School,
Cambridge,
MA
10
Andrew Tuch, page 86
To inspect the books of accounts and call for periodical returns from recognized stock
exchanges.
4. To inspect the books of accounts of financial intermediaries and levy fees/ charges on
them.
5. To compel certain companies to list their shares in one or more stock exchanges.
6.
To educate investors.
7. To prosecute and judge directly the violation of certain provisions of the companies
Act.
8. To prohibit and prevent insider trading
9.
10. To regulate issue of capital and debt in primary and secondary market.
11. To prevent unfair trade practice and market manipulation.
Thus, SEBI drafts regulations in its legislative capacity, conducts investigations and
authorizes enforcement action in its executive function, passes rulings and orders in its
judicial capacity. Though this makes it very powerful, there is an appeals process to ensure
fairness and accountability through a Securities Appellate Tribunal (SAT). SAT was formed
in 1995 to act as a forum of justice to appeal against the orders passed by SEBI Board or
the adjudicating officer (AO) appointed under SEBI Act.
The general process flow of adjudicating and appeals process is usually as below but may
vary a little in some cases:
Commitment of O
Appointment of Adj
Detailed investigatio
by SEBI Board/ Adju
1
0
2.
4.
8.
Issuer Companies
Stock Exchanges
Stock Brokers
Mutual Funds
Investment Banks
Depository Participants
Venture Funds
Our analysis showed that almost all companies were following corporate governance
measures:
Particulars
Number of companies
Complied
Non Complied
Cannot
comment*
1044
106
312
71
7
21
1462
100
Total
Percentage
*Cannot Comment: Data includes fields which did not have any input,
hence cannot determine if compliance is done or not.
This analysis is limited to only examine whether companies had declared adherence to
prescribed corporate governance mechanisms and did not cover examining the quality of
such mechanisms or the benefit of such mechanisms for individual companies.
11
A study on corporate governance in India states that India has one of the best corporate
governance laws but poor implementation together which, together with socialistic policies of
the pre reform era has affected corporate governance. The legal environment plays a crucial
role in determining the nature of corporate governance in any country and encompasses two
important aspects the protection offered in the laws (de jure protection) and to what extent
the laws are enforced in real life (de facto protection).
Two indices have been used for this purpose a shareholder rights index ranging from 0
(lowest) to 6 (highest) and a rule of law index ranging 0 (lowest) to 10 (highest) to measure
the effective protection of shareholder rights. The first index captures the extent to which the
written law protected shareholders while the latter reflects to what extent the law is enforced
in reality. India has a shareholder rights index of 5, being one highest in the sample
examined of 49 countries but the rule of law index a score of 4.17 on this index ranking
41st out of 49 countries studied.
Thus it appears that Indian laws provide great protection of shareholders rights on paper
while the application and enforcement of those laws are lamentable. This difference in
protection of shareholders rights has led to completely different trajectories of financial and
economic developments in the different countries.
The study concludes that the bigger challenge in India lies in the proper implementation of
corporate governance rules at the ground level.
11
15
Bain and Band (1996) and Bhagat and Jefferies believe that the following form the pillars
of corporate governance and have a positive relationship with the value of a firm.
Dispersed ownership
Independent auditor
There are also other factors that affect the relationship between the value of a firm and
corporate governance which include a) role of judiciary, banks, government and politicians,
b)macro-economic factors such as economic growth rate, inflation, interest rates c) intangibles
such as goodwill, customer relations, supply chain and growth potential, etc.
12
Bhagat, Sanjai and Richard H Jefferies, 2002, The Economics of Corporate Governance
Studies, MIT Press
In other words, the value of a firm is a combination of of the monetary value plus the social
value of the firm.
Indian corporate governance systems are drawn from the Anglo Saxon model of corporate
governance where the focus is on shareholder value maximisationshareholder value being
16
derived in terms of market valuation of a firm .
Several studies have linked different parameters of performance to corporate governance to
assess its effectiveness. Some of these parameters include share price movements,
17
18
volatility of share prices, earnings per share, etc. Kaplan and Gibson suggest that
performance of a corporate governance system can be evaluated by investigating the link
between corporate performance and CEO turnover. The reasoning is that an effective
governance system requires poor performing managers to be penalised by removal.
However, Gibson also provides evidence that when the firm has a domestic private large
shareholder, the relationship between CEO turnover and corporate performance weakens in
emerging markets. This is also indicated in India, where the agency gap between owners
and managers is low , which is compounded by the fact that owners of the top 500
companies in BSE as on 30 September 2011 hold 60 % of the listed companies, creating a
strong entrenchment of management and therefore CEO turnover may not provide accurate
indications of good or bad corporate governance.
19
Chhaochharia and Laeven (2007) have evaluated the impact of firm-level corporate
governance provisions on the valuation of firms in a large cross-section of countries. They
have distinguished between governance provisions that are set at the country-level and
those that are adopted at the firm-level and conclude that governance provisions adopted by
firms beyond those imposed by regulations and common practices among firms in the
country have a strong, positive effect on firm valuation.
Despite the costs associated with improving corporate governance at the firm level, many
firms choose to adopt governance provisions beyond what can be considered the norm in
the country, and these improvements in corporate governance have a positive effect on firm
valuation. Indian software and other companies listed overseas, especially in the USA ,
followed these principles of voluntarily imbibing greater measures of corporate governance
for the perceived value it created for their businesses.
The challenge is to find a broad yet accurate measurement indicator that factor in the effect
of corporate governance by linking two or more appropriate parameters which reflect the
performance of a company within a certain environment. Tobins Quotient is widely used by
16
academicians as a proxy for firm performance when studying the relationship between firm
performance and corporate governance. Tobins Quotient or Tobins Q is a ratio devised by
Nobel Laureate James Tobin of Yale University in 1969 who hypothesised that the combined
market value of all companies on the stock market should be equal to their replacement
costs. The ratio is calculated as:
Tobins Q= Total Market Value of a Firm
Total Asset Value
(Where Total Asset Value refers to the replacement value of assets.)
If Tobins Q is equal to 1.0, the market value will be perfectly reflected by the recorded
assets of the company. If Tobins Q is greater than 1.0 then the value is greater than the
value of the companys recorded assets. The accepted view is that in such cases the market
value reflects some unmeasured or unrecorded asset of the company. This extra value is
often used as a proxy for corporate governance.
20
Cheung and Pruitt developed and empirically tested the robustness and usefulness of the
simple formulation of Tobins q. They concluded that the co-relation of the values obtained
through q values is theoretically correct and can be safely applied. This conclusion in many
ways supports the main assertions of another prior study on Tobins q by Perfect and Wiles.It
is now widely accepted that Tobins q is an appropriate proxy for the underlying, true q,
which is an indicative measure to invest.
Clause 49 of the Listing Agreement of Indian Companies
The corporate governance mandate is contained in the revised Clause 49 issued by
Securities and Exchange Board of India effective from April 1, 2004 for listed companies.
These provisions have been in effect for a period of seven years and can reasonably be
expected to be entrenched long enough for its effect to be reflected in certain parameters.
These provisions are designed to improve the way in which companies are managed. The
main provisions of Clause 49 are:
Guidelines
Board of
Directors
Audit
Committees
Subsidiary
Companies
Disclosures
CEO/CFO
certification
Impact
Objective
Risk Assurance
Capital Protection
Financial
Transparency
20
Net Profit (after tax) = Earnings Before Interest & Taxes minus Interest minus Taxes
Earnings Before Interest & Taxes = Operating Revenue- Operating Expenses+ NonOperating Income.
Operating Revenue= Sales Revenue
Tobins
Q
(mean)
Market
Cap/To
tal
201
1
3.47
2010
2009
2008
2007
2006
2005
Trend
3.5
2.2
4.04
3.85
4.24
3.27
Oscillatin
g
We observe that there was a marked increase in Tobins Q one year after corporate
governance regulations were introduced in 2005 and there has been a marked improvement
in the measure over the next 3 years, suggesting that the capital market reacted favourably
2011
2010
2009
200
8
200
7
200
6
30
30
26
3
3
3
1
2
8
2
3
70
69
71
6
3
5
9
5
8
5
9
100
1
100
3
100
4
10
0
1
0
10
0
1
4
10
0
1
18
0
2
0
20
05
Data Skewness
We also observed that there is great data skewness in the sample of BSE 100 with Tobins
Q ranging from less than 1 up to 25 as shown in the table below. Such a high Tobins Q
suggests that assets of those companies may be over utilised as compared to the amount of
capital invested in them. Theoretically, a high Tobins Q should encourage those companies
to invest more in capital to balance market valuations.
Tobins Q Spread Year-Wise
Tobins Q
Ratio
Not
Available
Upto 1
1 to 2
2 to 3
3 to 5
5 to 10
More than
10
Total
20
11
20
10
20
09
20
08
20
07
20
06
20
05
18
3
9
1
3
1
6
1
3
1
1
8
3
1
1
9
1
6
1
4
1
2
7
4
1
2
7
9
2
7
1
2
1
4
1
0
2
0
7
2
3
9
27
1
3
1
8
1
5
8
13
2
5
1
6
1
5
1
6
1
8
6
100
100
100
100
100
100
100
1
0
8
18
9
10
5
Alternatively, this high Tobins Q indicates that there is unexplained exuberance in capital
markets regarding certain companies which puts their market capitalisation far above what
the companies are actually worth. Sectors like Capital Goods, FMCG and Transport
Equipment show a high Tobins Q above 5 up to 25 which is inexplicable. Information
Technology shows Tobins Q on an average between 2 to 5, indicating that the capital
market factors in intangibles in the IT sector that is not reflected in total assets appearing in
financial statements. Only the Finance sector shows a consistent Tobins Q between 0 and
1.
Therefore, average Tobins Q depicted in the first table needs to be read in the context of
this skewness.
Other Financial Ratios:
21
We have analysed data of 100 companies over a period of seven years. This translates
into 800 financial statements from which we have extracted financial ratios that could
indicate effectiveness of corporate governance mechanisms. These ratios have then been
aggregated into annual figures to show the trend across BSE 100 companies and the results
are depicted in the table below:
21
20
11
12.98
20
10
13.67
20
09
13.16
20
08
15.94
20
07
15.98
20
06
14.29
20
05
13.41
Trend
18.59
19.28
19.17
23.08
24.77
21.53
20.75
Oscillat
ing
Profit/
Sales
14.78
15.17
13.75
15.07
14.07
13.31
13.75
Oscillat
ing
5.88
5.52
5.78
5.19
5.52
5.61
Oscillat
ing
Employee
cost as
6.10
%age of
sales
Cost of Debt
6.34
6.50
8.39
6.98
6.63
5.97
7.07
Oscillat
Oscillating
Employee Cost/Sales: Employee costs over sales shows a rising trend over the years of
the sample period. Improving corporate governance should contribute to more efficient HR
systems which should help to bring down employee costs as a percentage of sales, which,
however, is not supported by data. Rising employee cost can also be explained by rising
inflation (which would also have an adverse effect on sales) and therefore the effect of
corporate governance on employee costs is not clear.
Cost of Debt: Other than the exceptional year of 2009, the cost of debt shows a declining
trend. This could indicate that more value is created for shareholders as cost of financing
goes down.
Corporate governance is expected to bring in efficiencies in the way a business is run
and must, in the final analysis, be reflected in the outcomes as represented by
financial numbers. Some of these efficiencies would be reflected in a lower cost of
debt, more efficient employee costs per unit of sales, besides providing better returns
on assets and to shareholders.
Our analysis of data reveals that at an aggregate level, these financial ratios do not
provide any trend that conclusively points to the effect of better governance by itself
and may depict the influence of other macro-economic factors as well.
Correlation Coefficient
We find that these financial ratios do not independently provide conclusive proof of the effect
of corporate governance on financial performance. Therefore we examine if there is any
correlation between Tobins Q ratio (the proxy for corporate governance) and the main
profitability ratios of Return on Assets (ROA) and Return on Equity (ROE) as well as the
share prices (of corporate performance). Correlation coefficient is a measure of the strength
of linear association between two variables and will be between -1.0 and +1.0; that is, if the
co-relation is positive, there is a positive relationship between the two variables and vice
versa. The strength of the relationship is determined by the fraction beyond zero.
We have conducted a series analysis between Tobins Q and each of ROA, ROE and Share
Prices for each company in BSE 100 over seven years. We then found the correlation
coefficient for each of these companies and the result for the entire sample is:
Co-relation Co-effcient of Tob Q with ROA, ROE & Share Prices
Correlati
on
coefficie
nt
Return
on
Assets
(ROA)
Return
on
Equity
(ROE)
Share Prices
18
28
30
49
30
39
24
66
NA
0 to -1
0 to 0.5
0.5 to 1
Total
100
100
100
We observe that at a broad level, there appears to be a positive correlation between Tobins
Q ratio and certain profitability indicators as well as share prices. This suggests that
companies that are perceived by stakeholders to be better governed also, in fact, deliver
better returns. That is, not only do companies that rank higher on the corporate governance
actually display higher profitability but also their shares are valued higher.
However, while there may be some individual trends noticed in different years for certain
companies, these appear to be more because of sectoral and macroeconomic factors
cannot clearly be said to be because of introduction of corporate governance mechanisms
contained in Clause 49.
Perhaps the most significant result is the shifting of the mean Tobins Q over a period of
seven years which would indicate whether Clause 49 has helped companies achieve better
corporate governance. As indicated in table above this improvement of Tobins Q ratio has
not occurred, which, we believe, indicates that there are only a few companies which excel
on corporate governance parameters while the vast majority of companies (60 to 70 per
cent) have made no movement towards better corporate governance over the years, as
perceived by the capital market.
Thus, we conclude that there is no clear evidence of effectiveness of Clause 49 on
performance of companies.
Nature of Offence
22
Revised Penalty
2. The respective AO/ SEBI order were analyzed to study the entire judiciary process on
following factors:
Date of order
Time of Offence
Original Penalty
Time lag between the date of appointment of AO and date of show cause notice
Time lag between the date of show cause notice and the date of order passed by
AO/ SEBI
Time lag between the date of order passed by AO/ SEBI and the date of SAT order
Time lag between the date of SAT order and date of offence
Time lag between the date of AO/ SEBI order and date of offence
5. To ascertain whether the outcome of SAT order was in favour of SEBI/ Appellant,
following assumptions have been made:
Appeals decided in favour of Appellant comprise of cases where the order has
been completely set aside or the monetary penalty has been reduced to zero.
Appeals where the order has been withheld but the quantum or conditions or
amount of penalty has been reduced by Appellate have been taken as Relief to
Appellant. In case the order has been sent back to SEBI for further
investigation or a fresh order have been also considered as relief to Appellant.
6. In order to determine the nature of violations, data has been clubbed in the following
manner:
a) Price Manipulation comprises of the cases where promoters or directors or broker or
company has involved itself in synchronised/ circular/ cross deals to create artificial
volume and rig securities prices. It also consists of cases whereby false or misleading
corporate public announcements have been made or insider trading has been done.
b) Takeover violation comprises of the cases where the regulations relating to takeover
code i.e. Disclosures of more than 2%/5% voting rights, shareholding pattern by the
company have not been followed.
c) Investors grievances relate to the companies delays in dematerialisation of shares,
non-redress of investors grievances, huge selling in the shares with an objective to
defraud investors, delay in refund of investors funds, non-implementation of moral
code of conduct to protect investors interest.
d) Violation of code of conduct of brokers encompass the cases where the brokers have
not maintained proper books of accounts, segregation of client moneys and own
funds, fund based activities, unauthorised terminals, KYC norms non-compliance etc.
e) Non responsiveness of summons issued by SEBI includes the cases of zero
response or non-cooperation as to the quantum & timeliness of information submitted.
f) Failure to pay stock broker registration charges on a timely basis.
g) IPO manipulation includes the cases where fraudulent financing of IPOs have been
done to oversubscribe the shares and make disproportionate profits on the date of
listing or create benami shareholding. It also includes subscription to avoid under
subscription of shares.
7. This study cannot comment on final collection of the penalty amount by SEBI.
Observations
1. Nature of Offence
We have identified the nature of violations by categorising them as under:
Nature of Ofence
7
2 1
12
15
49
In our study, most of the cases pertain to share price manipulation or IPO manipulation
(56%), Stock Broker code of conduct violations (15%), Takeover Code Violation (12%).
This reflects the state of securities market where securities price manoeuvring is rampant
either at the time of issue of shares or later through means of circular trades, synchronised
deals and cross deals.
In such fictitious transactions the beneficial ownership in the scrip does not change but
artificial volumes are created, perhaps to lure common investors. In such cases the price is
not derived by fair market mechanism but by creating an artificial buying pressure.
However more research is required to comment upon SEBIs detection and disciplinarian
role in such cases.
2) Nature of Penalty
The amount and nature of penalties are laid down in Section 15 of SEBI Act. The penalties
in our sample are:
Nature of Penalty15
Monetary
Debarred from dealings in securities market Debarred from dealings in
securities market & Monetary
73
In 73% of the cases monetary penalty has been charged. A further analysis of the penalties
has been done in the following section on disposal of cases.
3) Disposal of Appeals
SEBI
49
In 49% of the cases the appeal has been decided in favour of SEBI and remaining 51%
cases the appellant has given full or partial relief to appellant.
In 49 cases which have been determined in favour of SEBI, a monetary penalty of Rs 296.50
lacs have been levied.
In 51 cases where the appellant has received full or partial relief, calculation has been done
to establish the amount of penalties waived by SAT. To facilitate the waiver calculation 11
cases have been excluded for the following reasons:
a) Impounding of money by SEBI and then ordered to refund the amount so impounded to the
appellant.
b) Cases with monetary penalty sent back to SEBI for fresh order forming part of relief to
appellant have not been considered.
c) Debarment from dealing in securities or cancellation of share broker certificate.
In remaining 40 cases the penalty has been waived by 90% bringing from Rs.997.05 lacs in
the original order to Rs 101 lacs in SAT orders.
This shows a degree of ambiguity in the basis of penalties levied by SEBI and also in
the policy of reversal later on.
60
40
30
20
10
No. of Orders
Interpretations:
i.
ii.
iii.
A comparison of the date of order by AO/ SEBI with the date of Show Cause Notice
to determine the amount taken to complete the process of enquiry after the notice
has been sent to the violator: In 37% of the cases the proceedings have been
completed in one year. However in 40% cases it took more than 2 years to complete
proceedings. Such long periods carry the risk of the defaulter becoming untraceable,
destruction of circumstantial evidence and increasing investor losses.
iv.
A comparison of date of order by AO/SEBI with time when the offence was
committed to determine the time taken to actually punish the violation: In 25% cases
the order is passed within 3 years whereas in 56% cases it takes more than 5 years
to pass an order.
v.
A comparison of date of SAT order with the date of passing an order by AO/ SEBI to
find the time taken by SAT to complete the appellate proceedings: In 59% of the
cases SAT proceedings have been completed within 6 months. This shows efficiency
in disposal of cases by SAT.
vi.
A comparison of the date of SAT order with date of offence to ascertain the time lag
between the time of non-compliance and the final indictment after first leg of appeal
process is complete: It takes more than 5 years in 64% of the cases from the time of
offence to the time of disposal of appeal at SAT with 16% in more than 9 years
bracket.
The above analysis shows that the investigation and appeals process is slow, often
arbitrary and opaque. While the process framework is good and in line with best
practices of justice and fair play, the problem lies in the implementation in routine
3
0
everyday cases. The entire process of enquiry, adjudication, trial, decision and appeal
must be streamlined and the reasonable time frame strictly enforced to help SEBI
perform its role as a good gatekeeper of corporate governance.
4.4
According to the SEBI guidelines of April 2007, a consent order means "an order settling
administrative or civil proceedings between the regulator and a person (Party) who may
prima facie be found to have violated securities laws. It may settle all issues or reserve an
issue or claim, but it must precisely state what issues or claims are being reserved. A
consent order may or may not include a determination that a violation has occurred."
Consent order allows compounding of offence whereby an accused pays compounding
charges in lieu of undergoing consequences of prosecution. Consent orders were introduced
with an objective of appropriate action, remedy and deterrence without resorting to litigation,
lengthy proceedings and consequent delays. Consent Orders can be passed in respect of all
types of enforcement or remedial actions including administrative proceedings and civil
actions. Any person who is notified that a proceeding may or will be initiated/instituted
against him/her, or any party to a proceeding already initiated/instituted, may, at any time,
propose in writing for settlement.
Consent orders are aimed to reduce the regulatory cost, time and effort spent on pursuing
enforcement actions. We have analyzed a few consent orders to determine the efficacy of
the entire process. This has been done in the following parts:
i.
Analysis of consent orders over a period of two years from September 1, 2009 to
September 30, 2011.
ii) Sample Study of 100 consent orders from May 1, 2009 to September 30, 2011
covering takeover regulations.
Analysis of consent orders over a period of two years from September 1, 2009 to
September 30, 2011
During the period of two years beginning September 2009 a total of 379 consent
orders have been passed. (Source: www/sebi.gov.in)
ii.
The consent orders have been plotted quarterly and monthly in the under mentioned
tables and graphs.
Sep-09Dec-09Mar-10Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11
Number of orders Quarterly
The data portrays a declining trend in the number of consent orders issued from as
high as 37 cases in month of September 2009 to 10 cases in September 2009. The
reason can be on account of negative media opinion on the procedures followed in
passing consent orders.
The data pertaining to two years showed multiple consent orders passed for the
same applicant. In the cases of 12 applicants, repetition ranging from 2 to 4 consent
orders has been observed. However the study cannot comment on group entities or
persons acting in concert with different names of the applicants.
SEBI consent order scheme aims to achieve litigation free alternative of achieving
justice and discipline but over enthusiasm towards this process may dissuade the
honest law abiders. This may also help the offenders to relieve themselves of severe
regulatory action by paying a paltry sum of penalty. One of the considerations for
passing consent order and compounding charges is applicants past record that is it
has not been found guilty of similar or serious violations in the past. However by
allowing multiple consent orders from the same violator may encourage tendency of
violations without any fear of law and its consequences.
ii) Sample Study of 100 consent orders from May 1, 2009 to September 30, 2011
covering takeover regulations.
A sample of 100 consent orders was studied for the following points:
Name of Applicant
23
Number of cases
35
31
30
25
20
20
21
19
15
10
5
7
2
0
0-60 days 60-120 days
ore than 360 days
To conclude 53% of the cases are resolved within 180 days, 28% cases take 180-360
days and remaining 19% cases are resolved in more than 360 days.
Thus SEBIs objective of avoiding lengthy legal proceedings, delays in litigation fulfilled
with the help of consent orders.
2. Date of Offence is defined as the date when the said regulation was not followed as per
the text of consent order. In cases where such date is not clearly mentioned, date of
23
offence has been taken as middle of the year; in case year only mentioned, in case date
not available date of adjudication, in case date of adjudication is not available then date
of show cause notice sent by SEBI is taken; in case of multiple failures of continuous
nature over a period of time, an average date has been taken & in other cases the first
date taken.
In case of suo motto applications when date of offence could not be ascertained as
above, date of application has been taken as the date of offence.
Ageing of the cases on the date of passing consent order date taking into account the
date of offence has been captured as under:
Number of cases
30
25
20
15
10
5
0
Number of cases
24
11
13
14
5
2
10
11
60
72
months months
to 84
to 96
monthsmonths
From the above it can be concluded that 35% of the cases which are more than 7
years old have been settled by way of consent order, which is may be the only way to
recover dues but 24% of the cases are less than 12 months old where SEBI could
have taken the normal route of prosecution which could be a stronger deterrent than
consent order.
There are no clear guidelines which determine which type of cases may be settled
through the consent order route, leaving considerable scope for discretion.
Number of cases
40
35
36
30
25
20
15
10
5
0
13
15
15
9
6
3
In 58% of the cases penalty levied is less than Rs 3 lacs. This points to the revenue
loss to SEBI and weaker monetary deterrent for regulatory lapses.
As per Section 15J of SEBI Act, the adjudicating officer while determining the
quantum of penalty should consider amount of disproportionate gain/ unfair
advantage accruing to defaultee, amount of loss caused to investor group and the
repetitive nature of default.
Compounding of offences has been allowed under the SEBI Circular of Consent
Order in lieu of prosecution. However an attempt to determine the basis of the
penalties levied as part of the study has remained inconclusive.
We have mapped the amount of penalty levied and the ageing of the case and the
results are:
No. of Orders
40
35
30
25
20
15
10
5
-
less
Rs 1Rs 3Rs
Rs5Rs 8Rs 12
Rs 20 > Rs 50
than equal
lac tolac
to Rs
50,000
to
50,000
lacs to lacs to lacs to Rs 3Rs 5Rs
lacs8Rs
tolacs
12Rs
Rs 20
50
lacslacslacslacslacs
to Rs 1lac
lacs
Number of cases
Admission
40
60
However, no correlation can be derived between the amount of penalty levied and
denial/ admission of guilt on the above assumption.
40
35
No. of Orders
30
25
20
15
10
5
less
Rs Rs 1 lacRs 3 lac Rs 5 lacs Rs 8 Rs
lacs
12
Rs 20> Rs 50
to Rs 3 to
lacs
Rs 5 lacs
than -equal to Rs50,000
50,000
to Rs 8to Rs lacs
12 to Rs 20
lacs to lacs
to Rs 1lac
lacs Rs 50
lacs
lacs
lacs
Amount in Rupees Lacs
Admission cases
5) Suo Motto
In 13 out of sample 100 cases the applicant has suo motto filled for settlement
through consent before initiation of the adjudication proceedings by SEBI. In 3 out of
these 13 suo motto cases the settlement is without admission or denial of guilt
pointing towards opacity of the entire process.
In other 87 cases the consent application has been filled during the adjudication
proceedings.
The system of consent orders may be effective for settling cases but it lacks
transparency and is marred with opacity in terms of
We also noticed that the Adjudicating Officer is very powerful in the entire
process by playing a significant role in the issue of showcause notices,
enquiry, forwarding the case for settlement and approving authority in consent
orders which calls for greater transparency and clearer guidelines.
We conclude that SEBI has played a big role in instituting a basic standard of
corporate governance in the country, albeit only for listed companies. However,
research shows that if one sector of an economy displays certain behaviour, there is
a spill-off effect on other sectors as well and thus, corporate governance norms in
listed companies may reasonably be expected to influence adoption of such practices
in unlisted companies and other businesses too.
The study could not find any conclusive evidence that adopting corporate governance
norms as mandated by SEBI has any improvement on corporate performance as
measured by accepted standards of Return on Assets or Return on Equity. While
profitability per se as well as share prices have shown a consistent upward trend,
there is no clear evidence that this is because of improved corporate governance
alone and not a mix of macro economic factors.
24
24
SEBIs Regulation of the Indian Securities Market: A Critical Review of the Major
Developments, G. Sabarinathan
Similarly, SEBIs record in enforcing the canons of corporate governance has not
been impressive. The reason for the same may partly be the regulatory arbitrage that
has been noted earlier due to the joint responsibility for oversight of companies
between the MCA and SEBI. For reasons that are understandable, the two agencies
approach regulatory oversight somewhat differently and are endowed with different
organizational and legal capacities in the enforcement of their regulatory remit. The
Indian corporate sector took advantage of this arbitrage when it successfully pushed
back the initial, more demanding set of recommendations of the Committee headed
Mr Narayana Murthy.
Black and Khanna (2007) have tried to estimate the impact of compliance with
Clause 49 on the market valuation of companies in India. It concludes that faster
growing firms gained more than other firms, consistent with firms that need external
equity capital benefiting more from governance rules. Cross-listed firms gained more
than other firms, suggesting that local regulation can sometimes complement, rather
than substitute for, the benefits of cross-listing.
The positive reaction of large Indian firms contrasts with the mixed reaction to the
Sarbanes- Oxley Act (which is similar to Clause 49 in important respects), suggesting
that the value of mandatory governance rules may depend on a countrys prior
25
institutional environment .
Although SEBI is a young institution it has been fairly successful in fulfilling its
mandate as the capital market regulator, ensuring deepening of markets and
increasing participation of investors. However the enforcement process tends to be
somewhat arbitrary and rather opaque and leaves scope for discretion in the hands
of officials. The system of enforcement is also slow as these statistics show: As per
Annual Report of SEBI for 2010-2011, Page 110- Page 112, there are 3,493 pending
cases as on March 31, 2011. On analysis of these cases we find that as many as
32% of the pending cases have an ageing of 6 or more than 6 years while 28% of the
cases have been pending for 3 to 5 years (Annexure I). During the year 2010-11 a
total of 1801 cases have been disposed off by SEBI; out of these, 9% of the cases
pertain to 2004-2005 or years before almost more than 6 years old, 41% of the
disposed cases are 3-5 years old. Only 18% of the cases pertain to 2010-2011.
(Annexure II).
The enforcement system needs to be made more transparent to ensure greater
confidence in capital markets. While the inherent spirit of framework is robust and in
line with best practices of bringing timely justice and fair play, the problem lies in the
implementation which needs to be more effective for capital markets to be buoyant
and transparent.
25
Khanna, Vikramaditya S. and Black, Bernard S., Can Corporate Governance Reforms
Increase Firms Market Values? Evidence from India, Journal of Empirical Legal Studies, Vol
4, 2007: ECGI-Finance Working Paper no. 159/2007; University of Michigan Law &
Economics, Olin Working Paper No.07-002. http://ssrn.com/abstract=914440)
ANNEXURES
40
Annexure I SEBI
As per Annual Report of SEBI for 2010-2011, Page 110- Page 112, there are 3,493 pending
cases as on March 31, 2011. The details of the cases are as follows:
1995-96
Cases
U/sec
11, 11B
& 11D 0
Enquiry
Proceedin
gs
0
Adjudicati
ng
Proceedin 0
Prosecuti
on
Proceedin7
Summary
Proceedin
gs
0
Tot
al
cas 7
Percenta
ge of
cases 0.2
1996-97
1997-98
0.1
1
0.2
1998-99
19992000
2000-01
23
29
24
2001-02
81
2002-03
48
11
193
2003-04
80
14
13
381
19
2004-05
66
13
61
2005-06
42
24
62
2006-07
63
33
134
23
Year
2007-08
11
53
371
39
2008-09
13
120
29
2009-10
27
7
31
17
301
30
16
287
17
6
100
1
155
950
81
2010-11
Total
130
6
1
7
2
0
0.4
9
0.7
5
5
8
8
2
1.6
6
2.4
25
8
50
7.3
9
14.5
7
14
0
12
14.0
8
25
3
58
4
16.6
16
2
62
4.6
4
17.8
5
63
6
349
9
18.2
1
100
4
1
1
3.6
6
7.2
Annexure II SEBI
During the year 2010-11 a total of 1801 cases have been disposed off by SEBI. The details
of the cases are as follows:
Year
Enquiry
Proceedin
gs
Adjudicati
ng
Proceedin
gs
Prosecuti
on
Proceedin
gs
Summary
Proceedin
gs
Tot
al
cas
es
1995-96
Case
s
U/se
c 11,
11B
0
0.0
1996-97
1997-98
0.0
0
0.0
1998-99
19992000
2000-01
2001-02
2002-03
14
15
3
3
1
14
10
23
13
56
90
2006-07
9
1
8
5
27
106
2007-08
4
6
14
295
2008-09
2
3
6
255
229
9
3
0
32
284
22
94
2003-04
2004-05
2005-06
2009-10
2010-11
Total
108
125
7
Percenta
ge of
cases
0
0.0
0
0.1
7
0.2
8
0.1
4
1
5
2.2
8
3.1
7
5
2
17
6
2.8
9
9.8
7
18
7
37
3
10.3
8
20.5
28
1
30
15.6
0
16.8
3
32
2
180
2
17.8
8 10
43