GOVERNANCE OF RECOGNISED STOCK EXCHANGES

[Mr. M. GOVINDARAJAN]

CORPORATE GOVERNANCE:

'Corporate Governance' has been defined in various quarters from different angles. The definition for 'Corporate Governance' by International Chamber of Commerce is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the Board of Directors is accountable for this pursuit of corporate objectives and that the corporation itself confirms to the law and regulations. 

A few commonly accepted principles of Corporate Governance as follows:

* Rights and equitable treatment of shareholders;

* Interest of other stakeholders;

*Role and responsibilities of the Board;

*Integrity and ethical behavior;

*Disclosure and transparency.

With regard to Listing Agreement, the following points deserve attention:

* Shareholders in listed companies needed additional protection;

* Stakeholder protection was also considered important;

* Corporate misfeasance in India and elsewhere necessitated faster reforms in governance;

* Easier and faster way to offer governance protection was through amendment of listing agreement culminated in introduction of clause 49 of the Listing agreement in 2001.

GOVERNANCE OF RECOGNISED STOCK EXCHANGES

Securities and Exchange Board of India has issued a Master circular consolidating the circulars/directions issued by SEBI up to 31.03.2010. Part III of the said master circular deals with the governance of recognized stock exchanges. The said part deals with the following:

* Composition of the Governing Board;

* General requirements;

* Eligibility for election of trading members on the Governing Board;

* Chief executive;

* Statutory committees;

* Code of conduct for the directors of Governing Board;

Composition of the Governing Board:

The Master circular requires the composition of the Governing Board of all recognized stock exchanges shall be as under-

Trading member directors shall constitute a maximum of one fourth of the total strength of the Governing Board;

Public interest directors shall constitute one fourth of the total strength of the Governing Board;

Shareholder directors shall constitute the balance of the Governing Board.

* General requirements:

The Master circular prescribes the requirements relating to governance of stock exchanges which are as under-

* The directors, except the public interest directors and the Chief Executive such as CEO, ED, MD etc., shall be elected by the shareholders;

* No director shall hold office for more than two consecutive terms;

* 'Trading member directors' shall be elected from amongst the trading members of the concerned stock exchange;

* 'Shareholder directors' shall be elected from amongst the persons, who are not trading members or associates of trading members. 'Associate' in relation to a trading member, individual, body corporate or firm, shall include a person-

* who, directly or indirectly, by himself, or in combination with other persons, exercises control over the trading member, whether individual, body corporate or firm or holds substantial share of not less than 15% in the capital of such entities; or

* in respect of whom the trading member, individual or body corporate or firm, directly or indirectly, by itself or in combination with other persons, exercises control, or

* whose director or partner is also a director or partner of the trading member, body corporate or the firm, as the case may be.

* Public Interest directors shall be elected by the Governing Board from amongst the persons in the SEBI constituted panel. A person shall not act as public interest direct on more than one stock exchange simultaneously.

* The chairman shall be elected by the Governing Board from amongst the non executive non trading member directors. If, for some reason, it is not possible for the Governing Board to elect a permanent chairman, the Governing Board may elect a Chairman for every meeting of the Board from amongst the non executive non trading member directors of the Governing Board;

* The manner of election, appointment, tenure, resignation, vacation etc., of directors (except the chief executive) shall be governed by the Companies Act, 1956 save as otherwise specifically provided under or in accordance with the Securities Contracts (Regulation) Act, 1956;

* The Chief Executive shall be an ex-officio director on the Governing Board;

* No approval of SEBI shall be required for appointment of any director, except for the Chief Executive;

* SEBI may nominate directors on the Governing Board as and when deemed fit.

Eligibility for election of trading members:

The Master circular prescribes eligibility criteria for the trading members to be elected to the Governing Board of a stock exchange. 

No individual trading member shall be eligible to be elected as member of the Governing Board if-

* he is not a citizen of India;

* he has been a trading member for less than three years standing on the last day for submission of proposals by candidates for election;

* he has at any time been declared a defaulter or failed to meet his liabilities in ordinary course or compounded with his creditors;

* In case of a Corporate Trading Member, one of its whole time directors subject to the fulfillment of the following conditions in addition to the above would be eligible to be elected as a trading member of the Governing Board:

* in case the director resign/retires from the Board of the company, or is removed from the board of the company and one post on the Governing Board falls vacant, the vacancy will be filled as per the rules of the exchanges and corporate trading members will not have right to replace the trading member;

In case of conversion of individual trading member/partnership firm into a corporate trading member, and the individual/partner(s) are whole time director(s) of the corporate then the previous experience of such trading member(s) would be considered for meeting eligibility norms to become member of the Governing Board.

Suspension of Trading Member:

In the event of suspension of trading, suspension of the registration as trading member because of any disciplinary action taken against it by the stock exchange/SEBI the trading member shall not be eligible to continue on the Governing Board and shall also not be eligible to be elected to the Governing Board for two years from the date of expiry of such suspension of trading or suspension of registration. 

Ineligibility:

A trading member whose registration has been cancelled shall not be allowed to continue on the Governing Board or be eligible to be elected to the Governing Board. The persons failing in the category of notified persons as per the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, would not continue on the Governing Board and would not be eligible to be elected to the Governing Board for two years from the date such person is notified under the said Act.

CHIEF EXECUTIVE:

The appointment, renewal of appointment and the terminal of service of the Chief Executive shall be subject to prior approval of SEBI. The exchange shall, however, determine the manner of selection, terms and conditions of appointment and other procedural formalities associated with the selection/appointment of the chief executive. The stock exchange shall constitute a committee for the selection of Chief Executives. The Committee shall consist of four persons, one representative from the exchange, two outside experts and one public interest director. The approval of SEBI is not required for the constitution of such committee.

The stock exchange shall submit an undertaking, while recommending the names to SEBI, that the necessary due diligence has been carried out by them with regard to the verification of antecedents, credentials and experience of the proposed persons. In order for smooth functioning of Chief executive-

* Adequate financial powers like sanctioning the normal revenue expenditure and issue of cheques are given to the chief executive;

* One more officer shall be the co-signatory on the cheques to ensure that at least two persons sign the cheque;

* The elected directors shall not interfere in the day to day management of the exchange, particularly relating to the surveillance and risk management functions;

It shall be the duty of Chief Executive to give effect to the directives, guidelines and other orders issued by SEBI in order to implement the applicable provisions of law, rules, and regulations as also the Rules or the articles of association, regulations and bye-laws of the stock exchange. Any failure on the part of the Chief Executive will make him liable for removal or termination of services by the exchange with the prior approval of SEBI, subject to the concerned chief executive being given an opportunity of being heard against such termination.

Statutory Committees:

The Rules or Bye-laws of the exchange shall provide that not more than twenty per cent of the members of the Arbitration Committee, Disciplinary Committee, Defaults Committee and Investor Services Committee shall be trading members. However, the Arbitration Committee in case of disputes between a trading member and non trading member shall not have representation of the trading members. The appointment of trading members on these committee shall not require the approval of SEBI.

Code of Conduct:

The Stock exchange shall frame and apply a set of criteria as near thereto the SEBI (Intermediaries) Regulations, 2008 to the directors on the Governing Board of the exchange. All the directors of the stock exchange shall-

* not participate in the discussion on any subject matter in which any conflict of interest exists or arises, whether pecuniary or otherwise, and in such cases shall be disclosed and recorded in the minutes of the meeting;

* not encourage the circulation of agenda papers during the meeting unless circumstances so require;

* offer their comments on the draft minutes and ensure that the same are incorporated in the final minutes;

* insist on the minutes of the previous meeting being placed for approval in subsequent meeting;

* endeavor to have the date of next meeting fixed at each Board meeting in consultation with other members of the Governing Board;

* endeavor that in case all the items of the agenda of a meeting  were not covered for want of time, the next meeting is held within 15 days for considering the remaining items;

* participate in the formulation and execution of strategies in the best interest of the exchange and contribute towards pro-active decision making at the Board level;

* give benefit of their experience and expertise to the exchange and provide assistance in strategic planning and execution of decisions;

* endeavor to ensure that the exchange abides by all the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, Rules Regulations framed there under and the circulars, directions issued by the Government/SEBI from time to time;

* endeavor compliance at all levels so that the regulatory system does not suffer any breaches;

* endeavor to ensure that the exchange takes commensurate steps to honor the time limit prescribed by SEBI for corrective action;

* not support any decision in the meeting of the Governing Board which may adversely affect the interest of investors and shall report forthwith any such decision to SEBI;

* place priority for redressing investor grievances and encourage fair trade practice so that the exchange become an engine for the growth of the securities market;

* endeavor to analyse and administer the exchange issues with professional competence, fairness, impartiality, efficiency and effectiveness;

* submit the necessary disclosures/statement of holdings/dealings in securities as required by the exchange from time to time as per their rules or articles of association;

* unless otherwise required by law, maintain confidentiality and shall not divulge/disclose any information obtained in the discharge of their duty and no such information shall be used for personal use;

* maintain the highest standards of personal integrity, truthfulness, honesty and fortitude in discharge of their duties in order to inspire public confidence and shall not engage in acts discreditable to their responsibilities;

* perform their duties in an independent and objective manner and avoid activities that may impair, or may appear to impair, their independence or objectivity or official duties;

* perform their duties with a positive attitude and constructively support open communication, creativity, dedication and compassion;

* not engage in any act involving moral turpitude, dishonesty, fraud, deceit or misrepresentation or any other act prejudicial to the administration of the exchange.