SEBI’s Role in Corporate Governance Enforcement

Introduction

Corporate governance has evolved from a peripheral concern to a central focus of securities regulation in India over the past three decades. The Securities and Exchange Board of India (SEBI), established in 1992 as the statutory regulator of securities markets, has progressively expanded its role in shaping, implementing, and enforcing corporate governance standards. This expansion has created a complex and sometimes controversial dual identity for SEBI—simultaneously functioning as both a market regulator enforcing compliance with existing standards and as a quasi-legislative policymaker establishing new governance requirements. This article examines SEBI’s evolving role in corporate governance enforcement, analyzing the statutory foundations of its authority, tracing the expansion of its governance mandate through key regulatory initiatives, evaluating landmark enforcement actions that have defined its approach, examining judicial perspectives on the appropriate boundaries of its authority, and considering the institutional and structural challenges in balancing its dual role. The analysis reveals a nuanced picture of an institution navigating the tension between providing regulatory certainty and maintaining the flexibility to address emerging governance challenges in India’s rapidly evolving corporate landscape.

The Statutory Foundation: SEBI’s Authority Over Corporate Governance

SEBI’s authority over corporate governance matters stems from multiple legislative sources that have been progressively expanded through amendments, creating a complex and sometimes overlapping jurisdictional landscape.

The SEBI Act, 1992: Establishing Foundational Authority

The Securities and Exchange Board of India Act, 1992, established SEBI as the primary regulator of securities markets with a threefold mandate that implicitly encompassed corporate governance concerns:

Section 11(1) of the SEBI Act delineates this mandate: “Subject to the provisions of this Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit.”

Section 11(2) further enumerates specific powers, including under subsection (e): “registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner.”

The original Act, however, contained relatively limited explicit references to corporate governance, reflecting its initial focus on market infrastructure and intermediary regulation rather than issuer governance.

The Companies Act Interface: Overlapping Jurisdiction

The Companies Act, 2013 (replacing the earlier 1956 Act), created a more explicit role for SEBI in corporate governance by recognizing its parallel jurisdiction over listed companies in several key areas:

Section 24 of the Companies Act, 2013, specifically provides: “Notwithstanding anything contained in this Act, the provisions of this Act shall apply to the issue and transfer of securities and non-payment of dividend by listed companies or those companies which intend to get their securities listed on any recognized stock exchange in India, except insofar as the provisions of this Act are inconsistent with the provisions of the Securities and Exchange Board of India Act, 1992 or the Securities Contracts (Regulation) Act, 1956 or the rules or regulations made thereunder.”

This provision effectively created a carve-out for SEBI’s jurisdiction over listed companies in areas involving securities issuance, transfer, and related governance matters. The resulting parallel jurisdiction has created both opportunities for regulatory innovation and challenges of regulatory coordination.

Legislative Amendments Expanding SEBI’s Governance Authority

Several key amendments have progressively expanded SEBI’s authority over corporate governance matters:

The SEBI (Amendment) Act, 2002, significantly enhanced SEBI’s powers by adding Section 11(2)(ia), authorizing it to “call for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act.” This amendment substantially strengthened SEBI’s investigative capacity regarding corporate governance violations.

The SEBI (Amendment) Act, 2013, further expanded its authority by adding Section 11B(2), empowering SEBI to “issue such directions to any person or class of persons referred to in section 12, or associated with the securities market, or to any company in respect of matters specified in section 11A.” This amendment broadened SEBI’s ability to issue directions regarding corporate governance practices.

The SEBI (Amendment) Act, 2019, added Section 15HAA, creating specific penalties for listed companies or their promoters or directors who fail to comply with listing conditions or standards, with fines potentially extending to ₹25 crore. This amendment explicitly recognized SEBI’s authority to enforce governance-related listing requirements.

Judicial Interpretation of SEBI’s Statutory Authority

The courts have generally adopted an expansive view of SEBI’s statutory authority over corporate governance matters, particularly when connected to investor protection concerns.

In SEBI v. Ajay Agarwal (2010), the Supreme Court held: “SEBI’s statutory mandate to protect investor interests and ensure orderly market functioning must be interpreted purposively to encompass governance practices that materially impact those interests. The modern securities regulatory framework necessarily extends beyond traditional market manipulation concerns to include the governance structures and practices that determine how corporate decisions affecting investor interests are made.”

The Bombay High Court further elaborated in Sahara India Real Estate Corporation Ltd. v. SEBI (2013): “The legislative intent behind establishing SEBI was to create a specialized regulatory body with the expertise and authority to address the complex interrelationship between corporate governance practices and market integrity. This requires recognizing SEBI’s authority to regulate governance matters that have direct bearing on investor protection, even where such regulation overlaps with traditional company law domains.”

The Evolution of SEBI’s Corporate Governance Framework

SEBI’s role in corporate governance regulation has evolved significantly over three decades, progressing from voluntary guidelines to increasingly mandatory and detailed prescriptions. This evolution reflects both SEBI’s expanding conception of its regulatory role and its responsiveness to governance failures that revealed gaps in the existing framework.

The Foundational Phase: Clause 49 and the Initial Framework (1999-2008)

SEBI’s first major foray into corporate governance regulation came through the introduction of Clause 49 to the Listing Agreement in 2000, based on recommendations of the Kumar Mangalam Birla Committee. This initial framework established basic governance requirements for listed companies covering:

1. Board composition, including minimum number of independent directors
2. Audit committee formation and functioning
3. Board procedures and information flows
4. CEO/CFO certification of financial statements
5. Disclosure of related party transactions

Clause 49 initially adopted a relatively principles-based approach, establishing broad governance objectives while providing companies flexibility in implementation. The framework also incorporated a “comply or explain” approach for certain provisions, particularly regarding board independence.

Justice N.K. Sodhi, former presiding officer of the Securities Appellate Tribunal, observed in a 2007 speech: “SEBI’s initial corporate governance framework through Clause 49 represented a significant innovation within the Indian regulatory landscape. Rather than waiting for comprehensive legislative reform, SEBI utilized its authority over listing requirements to establish governance standards that exceeded then-prevailing statutory requirements under the Companies Act, 1956.”

The Responsive Phase: Post-Satyam Reforms (2009-2013)

The 2009 Satyam scandal, involving accounting fraud at one of India’s prominent technology companies, prompted a substantial reassessment of SEBI’s governance framework. This period saw SEBI shift toward more mandatory and detailed prescriptions through several key initiatives:

The revised Clause 49 guidelines implemented in 2011 strengthened requirements regarding:

1. Independent director qualifications and responsibilities
2. Related party transaction approvals
3. Risk management oversight
4. Whistleblower mechanisms
5. Board evaluation processes

SEBI also issued the Corporate Governance Voluntary Guidelines, 2009, which, while nominally voluntary, signaled SEBI’s expectations for governance practices exceeding mandatory requirements. These guidelines addressed:

1. Separation of CEO/Chairperson roles
2. Independent director nomination processes
3. Audit committee composition and expertise
4. Executive compensation structure
5. Shareholder engagement mechanisms

Particularly significant was SEBI’s introduction of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, which strengthened minority shareholder protections in control transactions, reflecting SEBI’s expanding conception of governance regulation to include ownership and control structures.

The Transformative Phase: LODR and Comprehensive Regulation (2014-Present)

The most recent phase has seen SEBI develop a comprehensive and increasingly prescriptive governance framework through the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), which codified and expanded the earlier listing agreement requirements into formal regulations with explicit statutory backing.

The LODR Regulations contain extensive governance requirements covering:

1. Board composition and functioning (Regulations 17-19)
2. Board committee structure and responsibilities (Regulations 18-22)
3. Related party transactions (Regulation 23)
4. Subsidiary governance (Regulation 24)
5. Risk management (Regulation 21)
6. Disclosure and transparency requirements (Regulations 30-46)
7. Shareholder rights and engagement (Regulations 26-29)

This framework has been repeatedly amended to address emerging governance concerns, with particularly significant changes including:

1. Enhanced independence requirements for board and committee composition through the SEBI (LODR) (Amendment) Regulations, 2018
2. Strengthened related party transaction requirements through amendments in 2019 and 2021
3. New requirements for environmental, social, and governance (ESG) disclosures through Business Responsibility and Sustainability Reporting requirements introduced in 2021
4. Enhanced group governance requirements for listed entities with multiple subsidiaries through 2019 amendments
5. Stricter board diversity requirements, including mandatory female independent directors, through 2018 amendments

In Vishal Tiwari v. SEBI (2021), the Delhi High Court characterized this evolution: “SEBI’s governance framework has progressed from establishing broad principles to developing an increasingly detailed and prescriptive regulatory architecture. This evolution reflects both the growing complexity of governance challenges in modern capital markets and SEBI’s expanding conception of its role from market regulator to corporate governance standard-setter.”

SEBI’s Role in Corporate Governance as Enforcer: Landmark Cases and Approaches

SEBI’s role in corporate governance enforcement has evolved alongside its regulatory framework, with several landmark cases illustrating its enforcement philosophy and methodologies.

The Satyam Case: Establishing Enforcement Credibility

SEBI’s handling of the Satyam Computer Services fraud case represented a watershed moment in its approach to governance enforcement. After founder B. Ramalinga Raju’s January 2009 confession to accounting fraud, SEBI initiated one of its most comprehensive investigations, ultimately resulting in multiple enforcement actions:

In its final order dated July 15, 2014, SEBI barred Ramalinga Raju and four others from the securities market for 14 years and ordered disgorgement of approximately ₹1,849 crore plus interest. The order methodically detailed governance failures, including board oversight deficiencies, audit committee ineffectiveness, and disclosure violations.

Particularly significant was SEBI’s detailed analysis of independent directors’ responsibilities. The order stated: “Independent directors cannot claim to be mere figureheads on the board, immune from liability when governance processes under their statutory oversight fail catastrophically. While not expected to engage in daily management, they bear specific responsibility for ensuring the integrity of systems and controls designed to provide the board with accurate information for decision-making.”

The Supreme Court, in upholding SEBI’s order in B. Ramalinga Raju v. SEBI (2018), endorsed this approach: “SEBI’s statutory mandate encompasses not merely technical compliance with governance regulations but substantive enforcement against governance failures that undermine market integrity and investor protection. In cases of serious governance breakdown, SEBI appropriately exercises its enforcement authority to both remediate specific violations and establish broader deterrence against similar governance failures.”

The Sahara Case: Defining Jurisdictional Boundaries

The protracted Sahara enforcement action clarified SEBI’s jurisdictional authority over governance matters at the boundary between public and private capital raising. The case involved Sahara India Real Estate Corporation and Sahara Housing Investment Corporation raising over ₹24,000 crore from millions of investors through instruments structured to avoid securities law compliance.

SEBI’s initial order dated June 23, 2011, determined that these instruments constituted securities subject to its jurisdiction despite being ostensibly structured as private placements. The order focused on governance failures including inadequate disclosure, misrepresentation to investors, and circumvention of regulatory requirements.

The Supreme Court’s landmark judgment in Sahara India Real Estate Corporation Ltd. v. SEBI (2012) endorsed SEBI’s expansive jurisdictional approach: “SEBI’s jurisdiction properly extends to capital-raising activities that in substance involve public investor protection concerns, regardless of technical legal form. Corporate governance regulation would be rendered ineffective if entities could escape appropriate oversight through artificial structuring designed to create regulatory gaps.”

Particularly significant was the Court’s recognition of SEBI’s role in addressing governance issues at the securities/company law intersection: “Where corporate actions involve both traditional company law concerns and securities market implications, SEBI’s specialized expertise in investor protection justifies its primary regulatory role. This concurrent jurisdiction enhances rather than undermines the overall corporate governance framework by bringing specialized regulatory focus to market-facing governance practices.”

The NSE Co-Location Case: Governance in Market Infrastructure

SEBI’s enforcement action against the National Stock Exchange regarding co-location services demonstrated its willingness to address governance failures at market infrastructure institutions themselves. The case involved allegations that NSE’s tick-by-tick (TBT) data feed system provided unfair advantages to certain trading members through differential access.

SEBI’s order dated April 30, 2019, directed NSE to disgorge ₹624.89 crore plus interest and prohibited it from accessing the securities market for six months. The order focused extensively on governance failures, including inadequate oversight by the board, conflicts of interest in management decision-making, and transparency deficiencies in system design and implementation.

The Securities Appellate Tribunal, while modifying certain aspects of SEBI’s order in NSE v. SEBI (2021), affirmed its authority to address governance failures in market infrastructure: “SEBI’s oversight responsibility regarding market infrastructure institutions necessarily encompasses their governance practices, particularly where those practices impact market fairness and integrity. The regulatory framework for securities markets would be fundamentally incomplete if it addressed listed company governance while leaving market infrastructure governance inadequately supervised.”

The Fortis Healthcare Case: Related Party Governance Failures

SEBI’s action against Fortis Healthcare Ltd. regarding fund diversion to promoter entities illustrated its approach to enforcing related party governance requirements. SEBI’s investigation revealed that Fortis had extended loans to entities controlled by promoters Malvinder and Shivinder Singh through a complex structure designed to obscure the related party nature of these transactions.

SEBI’s order dated October 17, 2018, directed Fortis to take necessary steps to recover ₹403 crore plus interest from the Singh brothers and related entities. The order focused on governance failures in related party oversight, including board negligence in scrutinizing transactions, inadequate disclosure to shareholders, and circumvention of approval requirements.

The order specifically addressed independent directors’ governance responsibilities: “Independent directors bear particular responsibility for safeguarding against abusive related party transactions. This responsibility encompasses not merely formal compliance with approval procedures but substantive scrutiny of transaction rationales, terms, and structures to identify arrangements designed to benefit controlling shareholders at the expense of the company and minority investors.”

The Delhi High Court, in upholding SEBI’s jurisdiction in this matter in Fortis Healthcare Ltd. v. SEBI (2020), emphasized: “SEBI’s corporate governance enforcement mandate properly extends to ensuring that control rights are not exercised to extract private benefits through related party transactions structured to evade regulatory scrutiny. This jurisdiction derives directly from SEBI’s investor protection mandate, as abusive related party transactions represent one of the most significant threats to minority shareholder interests.”

The NSDL/CDSL Case: Enforcing Group Governance Standards

SEBI’s enforcement actions regarding National Securities Depository Ltd. (NSDL) and Central Depository Services Ltd. (CDSL) governance highlighted its approach to group governance issues. The case involved questions about whether stock exchanges holding significant ownership stakes in depositories created conflicts that undermined governance independence.

SEBI’s circular dated February 4, 2020, implemented recommendations from the Bimal Jalan Committee by mandating ownership and governance separation between exchanges and depositories. The circular specifically required: “No stock exchange can have more than 24% shareholding in a depository, and no stock exchange shall nominate more than one director on the board of a depository.”

This regulatory intervention demonstrated SEBI’s willingness to address structural governance issues through both entity-specific enforcement and broader policy changes. The circular explicitly stated: “Effective governance requires not merely procedural safeguards but appropriate structural separation where necessary to prevent conflicts of interest from undermining independent decision-making. Market infrastructure governance particularly requires such structural protections given the systemic importance of these institutions.”

SEBI’s Role in Corporate Governance as Policymaker: Beyond Enforcement

Beyond its enforcement role, SEBI has increasingly functioned as a quasi-legislative corporate governance policymaker, establishing standards that go beyond implementing existing statutory requirements. This policymaking function operates through several distinct mechanisms that illustrate its expanding influence on governance practices.

Committee-Based Governance Standard Setting

SEBI has established a distinctive approach to governance policymaking through expert committees that develop recommendations subsequently implemented through regulatory changes. This approach combines technical expertise, stakeholder consultation, and regulatory authority in a process that operates largely independent of the traditional legislative process.

Key committees that have shaped SEBI’s governance framework include:

1. The Kumar Mangalam Birla Committee (1999), which established the initial Clause 49 governance framework with a focus on board independence and audit committee requirements.

2. The N.R. Narayana Murthy Committee (2003), which strengthened the governance framework with enhanced audit committee responsibilities and expanded disclosure requirements.

3. The Uday Kotak Committee (2017), which recommended the most comprehensive governance reforms subsequently implemented through the LODR Amendment Regulations of 2018. These reforms included:
   • Expanded independent director requirements
   • Enhanced board committee structures and responsibilities
   • Separation of CEO/Chairperson roles (though subsequently deferred)
   • Strengthened related party transaction regulations
   • Group governance frameworks for companies with multiple subsidiaries

Justice J.S. Verma, former Chief Justice of India, observed in a 2018 lecture: “SEBI’s committee-based governance policymaking represents a distinctive regulatory innovation combining technocratic expertise, stakeholder consultation, and adaptive implementation. This approach has enabled governance standards to evolve more rapidly than would be possible through traditional legislative processes, while maintaining legitimacy through structured consultation.”

Information Circular-Based Regulation

SEBI has extensively utilized its circular-issuing authority to establish governance requirements without formal statutory amendments or even regulatory changes. This approach provides regulatory flexibility but raises questions about certainty and appropriate process.

Significant governance policy developments through circulars include:

1. Circular SEBI/HO/CFD/CMD/CIR/P/2020/12 dated January 22, 2020, establishing enhanced disclosure requirements for default on payment of interest/repayment of principal amount on loans from banks/financial institutions.

2. Circular SEBI/HO/CFD/CMD-2/P/CIR/2021/562 dated May 10, 2021, implementing business responsibility and sustainability reporting requirements with detailed ESG disclosure obligations.

3. Circular SEBI/HO/CFD/CMD1/CIR/P/2021/575 dated June 16, 2021, extending governance requirements to high-value debt listed entities based on outstanding listed debt threshold.

4. Circular SEBI/HO/CFD/CMD/CIR/P/2020/60 dated April 17, 2020, relaxing certain governance requirements during the COVID-19 pandemic, demonstrating SEBI’s adaptability in policymaking.

These circulars often establish substantive governance requirements without the formal regulatory amendment process, raising questions about the appropriate boundary between enforcement guidance and quasi-legislative policymaking.

Informal Guidance and Interpretive Authority

SEBI’s informal guidance mechanism establishes another channel for governance policymaking through case-specific interpretations that establish precedential expectations. While technically non-binding, these interpretations substantially influence market practices and effectively establish governance standards in ambiguous areas.

Significant governance interpretations through informal guidance include:

1. Informal Guidance in the matter of PTC India Financial Services Ltd. (July 14, 2022), interpreting independent director resignation disclosure requirements and establishing expectations for board response.

2. Informal Guidance in the matter of Mahindra & Mahindra Ltd. (March 8, 2021), clarifying related party transaction approval requirements in complex group structures and establishing governance expectations for subsidiary-level transactions.

3. Informal Guidance in the matter of Bajaj Finance Ltd. (October 15, 2019), interpreting board composition requirements during transition periods and establishing compliance expectations following director departures.

These interpretations, while addressing specific inquiries, effectively establish broader governance expectations that companies incorporate into compliance practices, extending SEBI’s policymaking influence beyond formal regulations.

Consent Order and Settlement Mechanisms

SEBI’s settlement process, formalized through the SEBI (Settlement Proceedings) Regulations, 2018, has evolved into a significant governance policymaking mechanism. Through negotiated settlements, SEBI establishes governance expectations and remedial measures that influence practices beyond the specific cases involved.

Notable governance policy development through consent orders includes:

1. Tata Motors Ltd. consent order dated March 26, 2018, establishing governance expectations regarding related party disclosure specificity and timing.

2. ICICI Bank Ltd. consent order dated February 18, 2021, establishing detailed expectations for conflict of interest management and disclosure protocols for senior management.

3. Yes Bank Ltd. consent order dated April 12, 2021, establishing governance expectations regarding CEO succession planning and board oversight during leadership transitions.

These settlements typically include not only monetary penalties but also specific undertakings regarding governance reforms, effectively establishing standards through negotiated resolutions rather than formal regulation or adjudication.

The Tension Between Regulator and Policymaker Roles

SEBI’s dual role as both corporate governance enforcer and policymaker creates inherent tensions that manifest in several dimensions, raising important questions about institutional design, regulatory effectiveness, and appropriate boundaries.

Institutional Design Challenges

SEBI’s organizational structure was primarily designed for its regulatory enforcement functions rather than expansive policymaking. This creates several institutional tensions:

Resource allocation challenges emerge when the same personnel must simultaneously develop governance policies and enforce existing requirements. This dual responsibility can create workload imbalances and potentially compromise effectiveness in both roles.

Expertise limitations arise when enforcement-oriented staff must address complex policymaking questions requiring broader economic, legal, and business understanding. While SEBI has increasingly recruited specialized policy expertise, its institutional culture remains enforcement-oriented.

Consultation mechanisms designed primarily for regulatory enforcement actions may inadequately address the broader stakeholder engagement needs of governance policymaking. While SEBI has expanded consultation processes, they remain less developed than dedicated policymaking institutions’ mechanisms.

Former SEBI Chairman U.K. Sinha acknowledged these challenges in a 2019 speech: “SEBI’s institutional evolution has necessarily involved adapting structures designed primarily for market regulation to accommodate an expanding policymaking role, particularly in corporate governance. This adaptation remains a work in progress requiring continued institutional innovation to ensure both functions receive appropriate resources and expertise.”

Regulatory Certainty vs. Flexibility Tension

A fundamental tension exists between providing the regulatory certainty market participants require for compliance planning and maintaining the flexibility necessary to address emerging governance challenges.

When functioning primarily as an enforcer, SEBI appropriately focuses on regulatory certainty and predictable interpretation to facilitate compliance. However, its policymaking role often requires flexibility to address novel governance issues through evolving interpretations.

This tension manifests in several ways:

1. Retroactive application concerns arise when enforcement actions effectively establish new governance standards through interpretation rather than prospective rulemaking. This approach creates compliance uncertainty despite enhancing SEBI’s ability to address emerging issues.

2. Regulatory hierarchy questions emerge when informal mechanisms like guidance letters or consent orders establish governance expectations that carry significant compliance weight despite lacking formal regulatory status.

3. Transition period challenges occur when governance standards evolve through policymaking without adequate implementation timeframes, creating compliance difficulties for companies with established governance structures.

The Securities Appellate Tribunal addressed this tension in Yashovardhan Birla v. SEBI (2019): “While securities regulation requires adaptive interpretation to address emerging challenges, regulated entities are entitled to reasonable certainty regarding compliance expectations. When SEBI’s interpretations represent significant departures from established understanding, these should generally be implemented through prospective rulemaking rather than retrospective enforcement unless the interpretation merely clarifies what should have been apparent from existing provisions.”

Separation of Powers Considerations

SEBI’s expanding policymaking role raises separation of powers questions regarding the appropriate boundary between regulatory implementation and quasi-legislative governance standard setting.

Under traditional administrative law principles, regulators implement legislative policy judgments through statutory authority rather than establishing fundamental policy independently. However, SEBI’s governance regulation increasingly involves policy determinations going beyond straightforward implementation of statutory mandates.

This tension manifests in several contexts:

1. Legislative delegation questions arise when SEBI establishes governance requirements with limited explicit statutory foundation, raising concerns about the appropriate scope of delegated authority.

2. Democratic legitimacy considerations emerge when significant policy determinations affecting corporate structures and practices occur through regulatory processes with less public accountability than legislative action.

3. Judicial review challenges result from the ambiguous status of SEBI’s governance policymaking, creating uncertainty regarding the appropriate standard of review for quasi-legislative determinations.

The Supreme Court addressed these considerations in SEBI v. Rakhi Trading Pvt. Ltd. (2018): “While specialized regulatory bodies like SEBI appropriately exercise delegated authority with substantial discretion in technical domains, fundamental policy determinations affecting basic corporate governance structures should generally receive legislative sanction. Courts must carefully distinguish between technical implementation within statutory mandates and quasi-legislative policymaking that may exceed delegated authority.”

Landmark Judicial Decisions on SEBI’s Governance Authority

Several landmark judicial decisions have addressed the scope and limits of SEBI’s role in corporate governance, attempting to delineate appropriate boundaries for its dual role as enforcer and policymaker.

Bharti Televentures Ltd. v. SEBI (2015): Defining the Limits of Implied Powers

This Securities Appellate Tribunal decision addressed SEBI’s authority to impose governance requirements not explicitly enumerated in regulations. SEBI had directed Bharti to restructure certain related party transactions and implement governance reforms beyond specific regulatory requirements.

SAT held: “While SEBI possesses implied powers reasonably necessary to implement its statutory mandate, these powers cannot extend to imposing specific governance structures or transaction terms not required by regulations. SEBI’s authority to address investor protection concerns must be exercised through established regulatory mechanisms rather than case-by-case governance redesign. The appropriate remedy for perceived regulatory gaps is prospective rulemaking rather than expansive interpretation of existing provisions.”

This decision established an important constraint on SEBI’s ability to expand governance requirements through enforcement actions rather than formal regulatory processes.

Price Waterhouse v. SEBI (2018): Professional Gatekeepers and Systemic Governance

This Bombay High Court decision addressed SEBI’s authority to regulate professional gatekeepers as part of its governance oversight. SEBI had barred Price Waterhouse from auditing listed companies for two years due to its role in the Satyam accounting fraud.

The Court held: “SEBI’s authority properly extends to professional gatekeepers whose functions are integral to the corporate governance system protecting market integrity. Auditors, while regulated by their professional bodies, also function within the securities regulatory perimeter when their work directly impacts the reliability of financial information central to market functioning. This authority stems not from specific statutory enumeration but from the systemic role these gatekeepers play in the governance framework SEBI is mandated to oversee.”

This decision endorsed SEBI’s systemic approach to governance regulation, recognizing its authority over the broader ecosystem of governance mechanisms rather than merely direct corporate requirements.

National Stock Exchange v. SEBI (2021): Proportionality and Regulatory Discretion

This Securities Appellate Tribunal decision addressed the limits of SEBI’s remedial authority in governance enforcement actions. SEBI had ordered the NSE to disgorge profits and prohibited it from introducing new products for six months due to co-location service governance failures.

SAT held: “While SEBI possesses broad remedial authority, this discretion must be exercised proportionately to the governance violations established. Remedial measures that significantly impact market functioning require particularly careful justification connecting the specific governance failures to the remedies imposed. SEBI’s governance enforcement authority, while substantial, remains bounded by administrative law principles of proportionality, reasonableness, and rational connection between violation and remedy.”

This decision established important constraints on SEBI’s remedial discretion in governance enforcement, requiring proportionality between violations and remedies.

Zee Entertainment Enterprises Ltd. v. Invesco Developing Markets Fund (2021): Corporate Democracy and Regulatory Oversight

This Bombay High Court decision addressed the interaction between SEBI’s governance authority and shareholder rights in contested corporate control situations. The case involved Invesco’s requisition for an extraordinary general meeting to remove Zee’s CEO and appoint new directors, which Zee challenged on regulatory compliance grounds.

The Court held: “SEBI’s governance oversight operates within a framework respecting legitimate corporate democracy processes. While SEBI appropriately enforces compliance with specific regulatory requirements, it cannot substitute its judgment for proper shareholder decision-making through established corporate procedures. The corporate governance framework contemplates complementary roles for regulatory oversight and shareholder decision-making rather than regulatory displacement of corporate democracy.”

This decision established important limitations on SEBI’s authority to intervene in governance disputes between shareholders and management, preserving space for corporate democracy within the regulatory framework.

Piramal Enterprises Ltd. v. SEBI (2022): Evolving Interpretations and Regulatory Certainty

This Securities Appellate Tribunal decision addressed SEBI’s authority to establish new governance interpretations through enforcement actions rather than prospective rulemaking. SEBI had found Piramal in violation of related party transaction requirements based on an interpretation not previously articulated.

SAT held: “While SEBI necessarily interprets regulations through application to specific facts, substantial departures from established understanding or practice should generally occur through prospective rulemaking rather than retroactive enforcement. When governance requirements evolve through interpretation, regulated entities are entitled to: (1) clear articulation of the new interpretation; (2) reasonable explanation of its basis in existing regulations; and (3) appropriate opportunity to adjust compliance practices before facing enforcement consequences.”

This decision established important procedural constraints on SEBI’s ability to evolve governance requirements through enforcement interpretation rather than formal regulatory processes.

Comparative International Perspectives

Examining how other major securities regulators balance enforcement and policymaking functions in corporate governance provides valuable perspective on alternative institutional approaches and their implications.

United States: Separation with Coordination

The U.S. model establishes greater institutional separation between corporate governance enforcement and policymaking functions while maintaining coordination mechanisms:

The Securities and Exchange Commission (SEC) operates primarily as an enforcement agency implementing statutory mandates, with the Division of Enforcement handling investigations and enforcement actions regarding governance violations.

Corporate governance policymaking responsibilities are shared between:

1. Congress through legislative enactments like Sarbanes-Oxley and Dodd-Frank
2. State corporate law, particularly Delaware’s specialized corporate jurisprudence
3. Stock exchanges through listing requirements developed in consultation with the SEC
4. The SEC through limited rulemaking authority under specific statutory grants

This distributed model creates greater institutional specialization but requires coordination across multiple governance authorities. The U.S. Supreme Court addressed this structure in Business Roundtable v. SEC (2011), invalidating an SEC proxy access rule as exceeding its statutory authority: “The statutory scheme establishes defined boundaries for federal securities regulation of corporate governance, with state corporate law retaining primary authority over internal governance structures. Federal regulatory authority extends only to specific aspects explicitly addressed through congressional authorization rather than general governance policymaking.”

United Kingdom: Integrated but Accountable

The UK model establishes more integrated governance authority while maintaining accountability mechanisms:

The Financial Conduct Authority (FCA) serves as the primary securities regulator with both enforcement and policymaking functions for market-facing governance issues.

The Financial Reporting Council (until recently when replaced by the Audit, Reporting and Governance Authority) functioned as a specialized governance standard-setter through the UK Corporate Governance Code, operating on a “comply or explain” basis.

This approach combines specialized governance expertise with securities regulation while maintaining the flexibility of a principles-based “comply or explain” framework rather than purely mandatory requirements.

Lord Hoffman articulated the philosophy underlying this approach in Re Tottenham Hotspur plc (1994): “Corporate governance regulation appropriately balances mandatory minimum standards with principles-based expectations that allow adaptation to diverse circumstances. This balance requires specialized institutional expertise but also accountability mechanisms ensuring that governance standards reflect broader public policy rather than merely technical regulatory judgments.”

Australia: Twin Peaks with Explicit Division

Australia’s “twin peaks” regulatory model establishes an explicit division of responsibilities:

The Australian Securities and Investments Commission (ASIC) functions primarily as an enforcement agency addressing governance violations through investigation and litigation.

The Australian Prudential Regulation Authority (APRA) establishes governance standards for financial institutions through explicit standard-setting authority.

Corporate governance more broadly develops through:

1. The ASX Corporate Governance Council’s principles and recommendations
2. Statutory requirements in the Corporations Act
3. Common law fiduciary principles developed through court decisions

This model creates clearer institutional specialization while potentially creating coordination challenges across multiple authorities.

The Australian Federal Court addressed this structure in ASIC v. Rich (2009): “The regulatory architecture appropriately distinguishes between governance standard-setting functions requiring policy expertise and enforcement functions requiring investigative and litigation capabilities. This separation enhances institutional focus and expertise while requiring careful coordination to ensure cohesive governance expectations across regulatory domains.”

Policy Recommendations: Toward a More Balanced Framework

Based on this analysis of SEBI’s dual role challenges and comparative perspectives, several policy recommendations emerge for establishing a more balanced governance regulatory framework:

Institutional Structure Refinements

SEBI should consider organizational changes to better accommodate its dual functions while enhancing effectiveness in both roles:

A dedicated Corporate Governance Division with specialized expertise focused on policy development, distinct from enforcement functions, would enhance policymaking quality while allowing appropriate specialization.

A Regulatory Policy Committee including both SEBI officials and external experts could provide structured governance over policymaking functions, enhancing accountability and ensuring diverse perspectives influence standard-setting.

Enhanced coordination mechanisms with other corporate governance authorities, particularly the Ministry of Corporate Affairs, would promote regulatory coherence while respecting jurisdictional boundaries.

Former SEBI Chairman M. Damodaran has advocated such refinements: “SEBI’s expanding governance responsibilities require institutional adaptation to ensure both its regulatory enforcement and policymaking functions receive appropriate resources and expertise. The current structure, designed primarily for market regulation, requires thoughtful evolution to accommodate the increasingly complex governance oversight role without compromising either function.”

Enhanced Procedural Framework for Governance Policymaking

SEBI should establish a more structured procedural framework for governance policymaking that enhances transparency, participation, and rationality:

A mandatory Regulatory Impact Assessment process for significant governance initiatives would ensure systematic evaluation of potential costs, benefits, and implementation challenges before requirements are finalized. This assessment should include quantitative analysis where feasible and qualitative evaluation of potential market impacts.

Extended consultation periods specifically for governance initiatives would provide stakeholders adequate opportunity to analyze and comment on proposed requirements. These periods should include mechanisms for multiple consultation rounds for complex initiatives that may require refinement based on initial feedback.

Detailed explanatory materials accompanying new governance requirements would enhance implementation by clearly communicating regulatory objectives and compliance expectations. These materials should include illustrative examples of compliance approaches and address common implementation questions.

Structured sunset review provisions for governance requirements would ensure periodic reassessment of their continued appropriateness and effectiveness. These reviews should examine actual implementation experience, compliance costs, and observed benefits to determine whether requirements should be maintained, modified, or withdrawn.

The Delhi High Court emphasized the importance of such procedural safeguards in Tata Consultancy Services Ltd. v. SEBI (2020): “While SEBI possesses substantial authority to establish governance requirements, this authority should be exercised through processes that ensure affected parties have meaningful opportunity to provide input, understand regulatory objectives, and prepare for implementation. Robust procedural frameworks enhance both the quality of regulatory outcomes and their legitimacy in the regulated community.”

Clearer Delineation Between Enforcement and Policymaking

SEBI should establish clearer boundaries between its enforcement and policymaking functions to enhance both regulatory certainty and flexibility:

A formal Regulatory Interpretation Policy would clarify when enforcement actions establish new interpretations versus applying established requirements. This policy should specify that significant interpretive changes generally require prospective rulemaking rather than retrospective enforcement except in circumstances involving clear regulatory evasion.

Codification of enforcement precedents through periodic regulatory updates would transform case-specific interpretations into generally applicable standards available to all market participants. This process would enhance regulatory certainty while allowing evolution through enforcement experience.

A “no-action” letter program similar to the SEC’s would provide market participants a mechanism to obtain prospective guidance on governance compliance questions, reducing the need for interpretive evolution through enforcement. These letters could be published in anonymized form to provide broader guidance while protecting commercial sensitivity.

Compliance assistance programs specifically for corporate governance requirements would provide implementation guidance without enforcement implications. These programs could include workshops, compliance manuals, and direct consultation opportunities to enhance compliance before enforcement becomes necessary.

The Securities Appellate Tribunal endorsed this approach in Kotak Mahindra Bank Ltd. v. SEBI (2021): “Effective securities regulation requires both vigorous enforcement against violations and clear prospective guidance regarding compliance expectations. These functions, while complementary, operate according to different principles and should maintain appropriate separation. Enforcement actions appropriately address specific violations, while broader governance policy changes should generally occur through prospective rulemaking with adequate implementation timeframes.”

Legislative Framework Refinements

Certain aspects of SEBI’s governance authority would benefit from legislative clarification to establish clearer jurisdictional boundaries and enhanced accountability:

Statutory delineation of SEBI’s corporate governance authority through targeted amendments to the SEBI Act would provide clearer legislative authorization for its expanding role. These amendments should specifically address SEBI’s authority to establish governance standards beyond traditional disclosure and market conduct requirements.

Formal legislative recognition of SEBI’s coordination role with other governance authorities would enhance regulatory coherence. This framework should establish clear primary jurisdiction for different governance aspects while ensuring appropriate consultation mechanisms.

Enhanced parliamentary oversight mechanisms for significant governance initiatives would ensure democratic accountability for quasi-legislative determinations. These mechanisms might include requirements for parliamentary review of major governance reforms before implementation.

Statutory criteria for governance rulemaking would establish clearer parameters for SEBI’s policymaking discretion. These criteria could include explicit consideration of regulatory burden, international competitiveness, and proportionality to identified market failures.

The Supreme Court suggested the value of such legislative refinements in Union of India v. R. Gandhi (2020): “While specialized regulatory agencies appropriately exercise substantial discretion in technical domains, their quasi-legislative authority benefits from clear legislative boundaries and structured accountability mechanisms. As regulatory mandates expand beyond traditional domains, corresponding legislative framework evolution enhances both effectiveness and legitimacy.”

Conclusion

SEBI’s role in corporate governance enforcement presents a complex regulatory balancing act. From its origins as primarily a market regulator, SEBI has progressively expanded into a quasi-legislative governance policymaker with significant influence over corporate structures and practices. This evolution reflects both the global trend toward more comprehensive securities regulation and India’s particular corporate governance challenges requiring specialized regulatory attention.

The current framework contains both important strengths and significant tensions. SEBI’s Role in Corporate Governance is marked by its specialized expertise, enforcement capacity, and ability to adapt to emerging challenges, all of which represent valuable regulatory assets. However, the combination of enforcement and policymaking functions creates persistent tensions regarding institutional focus, regulatory certainty, and appropriate jurisdictional boundaries.

The landmark judicial decisions examined in this article have progressively defined the contours of SEBI’s governance authority while identifying important limitations. These decisions generally affirm SEBI’s expanded role in governance oversight while establishing procedural and substantive constraints ensuring this authority remains within appropriate boundaries. Particularly significant has been judicial recognition that SEBI’s role in corporate governance properly extends to the broader ecosystem of market governance while remaining bounded by principles of proportionality, procedural fairness, and respect for corporate democracy.

Comparative perspectives from other major jurisdictions suggest alternative institutional approaches worth considering. The U.S. model of greater institutional separation with coordination mechanisms, the UK’s integrated but accountable approach, and Australia’s explicit twin peaks division each offer valuable insights for potential Indian regulatory evolution.

Moving forward, targeted reforms could enhance SEBI’s role in corporate governance in both its enforcement and policymaking capacities while mitigating tensions between them. Institutional structure refinements, enhanced procedural frameworks, clearer delineation between functions, and legislative framework adjustments represent promising paths toward a more balanced regulatory approach. These reforms would preserve SEBI’s valuable role in governance enforcement while ensuring its policymaking function operates with appropriate transparency, participation, and accountability.

The continued evolution of SEBI’s Role in Corporate Governance will significantly influence India’s corporate governance landscape in the coming decade. By thoughtfully addressing the institutional and procedural challenges identified in this analysis, India can develop a governance regulatory structure that effectively balances investor protection with business flexibility, regulatory certainty with adaptive capacity, and technical expertise with democratic accountability. This balanced approach would support India’s continued development as a sophisticated capital market while ensuring corporate governance regulation serves its fundamental purpose of promoting sustainable value creation within a framework of fairness, transparency, and accountability.