Extraterritorial Compliance with Corporate Governance Norms

The Securities and Exchange Board of India (SEBI) has elucidated its position with the respect to the extra-territorial application of its corporate governance norms. In a recent informal guidance in the matter of KCP Limited, SEBI interpreted regulation 24(1) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR). The provision stipulates that an independent director of a listed company is to be appointed on the board of directors of an unlisted material subsidiary, whether incorporated in India or not. SEBI found that the provision needs to be adhered to extra-territorially if a foreign subsidiary’s home jurisdiction does not prohibit the compliance thereof. This post seeks to analyze the regulator’s approach towards the extra-territorial application of corporate governance norms.

Informal Guidance

KCP Limited (the applicant) sought an interpretative guidance from SEBI regarding compliance with regulation 24(1) of LODR.  KCP Limited has a subsidiary in Vietnam, namely KCP Vietnam Industries Limited (KCP Vietnam), incorporated under the laws of Vietnam. KCP Limited, in its application, has reiterated that a limited liability company incorporated in Vietnam does not need to form a board of directors. Article 55 of the Law on Enterprises of Vietnam posits that a limited liability company is not required to have a supervisor’s board unless it has more than 11 members. KCP Vietnam has 8 members and, thus, it not mandatory to form a supervisory board.

In response, SEBI stated that KCP Limited is required to comply with regulation 24(1), and that the Vietnamese Law of Enterprises does not prohibit the company, which is a subsidiary of the company incorporated in India, to form a supervisory board to run the company. SEBI has given directions to appoint an independent director of KCP Limited as a director of supervisory board of KCP Vietnam.

Comment

SEBI directions to form a supervisory board even if the foreign laws do not require it demonstrates an approach to ensure corporate compliances extra-territorially. In GVK Industries Limited v. Income Tax Officer, the Supreme Court of India held that the Parliament may exercise its legislative powers with respect to extra-territorial aspects or cause, events, things, etc., only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians. In Sahara India Real Estate Corporation Ltd. v. SEBI, the Supreme Court held:

“Subsection (1) of Section 11 of the SEBI Act casts an obligation on SEBI to protect the interest of investors in securities, to promote the development of the securities market, and to regulate the securities market, “by such measures as it thinks fit”. It is therefore apparent that the measures to be adopted by SEBI in carrying out its obligations are couched in open ended terms having no prearranged limits. It is necessary to record here that the aforesaid power to adopt “such measures as it thinks fit” to promote investors’ interest has not been curtailed or whittled down in any manner by any other provisions under the SEBI Act, as no provision has been given overriding effect over subsection (1) of Section 11 of the SEBI Act.”

SEBI, a quasi-legislative body, may enforce its law if it affects the interest of the securities market in India. SEBI’s direction to form a supervisory body instead of constituting a board of directors or appointment of independent director pursuant to regulation 24 LODR seems to simulate an approach to at least create a supervisory position to comply with corporate governance norms, inter alia, the appointment of independent director. A ‘supervisory board’ generally performs supervisory functions to check the legality, accuracy and honesty in the management and administration of the company’s business activities. At the outset, this approach displays SEBI’s trajectory to streamline the flow of information between the companies, and to avoid any informational asymmetry that becomes a subject of financial irregularities in listed companies in India. This stance taken by SEBI serves as guidance for companies with material subsidiaries to ensure that corporate governance may be adhered to when the foreign laws does not prohibit the same explicitly.

Further, it is necessary to highlight that SEBI has been lenient in terms of application of the provisions of the Companies Act 2013 as compared to the LODR. In response to an informal guidance sought by HCL Technologies Limited, SEBI adopted the view that if subsidiary’s home jurisdiction does not require compliance with or obligation to get its financial statement audited, the listed company can proceed by placing unaudited financial statement on its website. However, the stance that has been taken in the present informal guidance shows a different approach when it comes to corporate governance norms.

- Shubham Gupta

Tracking the Data Protection Regime in India

The article is authored by Abhishek Tripathy, a fourth-year law student at the Institute of Law, Nirma University. 

The Personal Data Protection Bill, 2019 as introduced in Lok Sabha has been referred to a Joint Parliamentary Committee of both the Houses, under the Chairperson of Smt. Meenakshi Lekhi for further evaluation. It has to be noted that this bill is not the same as the Draft Personal Data Protection Bill, 2018 which was made public by the Srikrishna Committee last year. The bill which is most likely to be placed in the winter session is expected to have certain changes especially with regards to the data localization norms. The bill will mark the way for a new data protection regime in India.

Background

The Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules which was released on 18th April, 2011 by power conferred under Section 87 (2)(ob) read with Section 43A of the Information Technology Act is the only existing law on data privacy in India. The SPDI Rules is currently the only existing law that ensures the safety and security of sensitive personal data or information. The IT Act defines sensitive personal data or information as such personal information which should be protected by the government with due consultation of professional and experts. According to Section 43A of the Act, a corporate body has to be accountable to the possession of any sensitive personal data or information, and any wrongful use of the same will make it liable to pay damages to the person aggrieved. 

The 2011 rules which specifically deal with body corporates and persons illustrate certain fundamental principles on data privacy. The rules define personal information as any information that directly or indirectly assists in the identification of an individual. A body corporate thus in case of usage of any information should provide a clear and accessible statement of its policies, the type of information and the purpose of such collection. Such Information collected must be necessary and shall not be retained for longer than required. Consent is the cornerstone of privacy laws around the world and the use, transfer or processing of personal data is impossible without prior permission. Obtaining consent is a prerequisite for the collection of information and an option of non-participation must be provided prior to the collection of information. 

The SPDI rules also allow for a right to review to the providers of information with an option to amend or change any data that is inaccurate. Moreover, the data collected cannot be used in any other manner than for the purpose for which it is collected. Security of information is the sole responsibility of the body corporate which acts as a data fiduciary in the entire process. Any kind of grievance should be dealt with by an officer (appointed by the body corporate) within a month of receipt of such grievances. Consent can also be withdrawn by the provider if it is sent in writing to the concerned corporate/person. Disclosure of SPDI to third parties is not prohibited if a similar level of data protection is provided and such disclosure is necessary for the performance of a contract between the three parties. A body corporate is said to comply with reasonable security practices and procedures, if they have implemented such security practices and standards such as either IS/ISO/IEC 27001 standard or the codes of best practices for data protection as approved. In cases of a breach, a body corporate can be mandated to prove the requisite practices followed. The absence of effective enforcement machinery, therefore, raises concerns about the implementation of the SPDI Rules.

The SPDI Rules recognise financial information, health information, etc as "sensitive personal data" and thus regulate its collection, use and disclosure. 

The other primary legal instruments that address data protection in the financial sector include the Credit Information Companies (Regulation) Act, 2005 (CIC Act), the Credit Information Companies Regulation, 2006 (CIC Regulations) and circulars issued by the Reserve Bank of India (RBI). According to the CIC Act, credit information companies (CICs) are identified as collectors of information and have to adhere to privacy principles at the stage of collection and use of such credit information. Maintenance of data secrecy along with adherence to a large number of recognised data protection principles is mandated by the CIC Act. As per RBI regulations, information collected through KYC and various other information collected therein should be kept secure and in utmost confidentiality. Data protection norms for personal information collected under the Aadhaar Act are found in the Aadhaar (Data Security) Regulations, 2016 (Aadhaar Security Regulations). The Aadhaar Security Regulations mandates UIDAI to have a security policy encapsulating varied measures adopted to keep information secure such as maintenance of confidentiality and controlling access to data collected. 

The Data Protection Bill, 2019

The bill is expected to have major changes with regard to the data localisation norms. The draft e-commerce policy was received with a lot of backlashes as it advocated that data of all kinds should be localized from India. The cost of maintenance, investment and trade were supposed to get adversely affected due to the government’s stance on data localisation. The bill of 2019 addresses this concern by differentiating varied kinds of data. The differentiation will be on the basis of “Sensitive Personal Data” and “Critical Data”. The sensitive personal data can be processed with consent outside the country but cannot be stored. The Critical Data, which is to be defined by the government (mostly on security and defence matters), will have to be mandatorily processed and stored in India. Whereas the general data can be processed and stored outside India. The entities will be given up to 2 years to make changes in their structure to adhere to the provisions of the Act. For the purpose of the investigation, certain agencies will be exempted from the bill. The penalty from a gross violation can go up to 15 Crore or 4% of the global turnover, whichever is higher. Minor violations can attack penalty up to 5 Crores or 2%, whichever is higher. The data protection bill will establish a much needed rigid and full-fledged data protection framework in India. 

Understanding 'Network Effect'

The article is authored by Abhishek Tripathy, a fourth-year law student at the Institute of Law, Nirma University. 

Network effect can be defined as a consumer’s effect from using a good or service on the total perceived value of that product or service for others. The number of users/consumers who use a product or service is directly proportional to the value of the network. Let’s take the example of an online messenger, suppose X no. of people join the messenger, it will attract Y no. of people who are not on the platform but want to access X through the services provided by the messenger. The e-commerce scenario in India is majorly a two-sided market, wherein there is a user network, a seller network and they both are connected through an intermediary. E-retailing platforms, food delivery applications, etc act as an intermediary to connect the supplier to the consumer. In a two-sided market, an increase or decrease in the number of users on either side of the market will affect the other side of the market i.e. more the no. of users, more the sellers would get attracted to the platform and vice versa (indirect network effect). This determines the value of the platforms and dominance in a certain sector which results in the market tipping in favor of the one with a greater number of users. Thus, there is a need to keep a check on entities with an existing network effect to prevent anti-competitive practices such as predatory pricing, unfair trade practice, etc. In the case of MCX v. NSE, the concept of network exchange was extensively discussed, perhaps for the first time in Indian competition jurisprudence. The dissenting opinion in the case laid down certain characteristics of network effect; 

1. The network effect creates an inverted U demand curve, equilibrium of which show variance in network sizes.  
2. The pace of market expansion is greater in industries with network effect as compared to no-network industries.  
3. Strong network effect creates natural oligopolies. Network industries are characterised by high inequalities of market shares and profits.  

It should be noted that there are two kinds of competition, one type of competition is “in the market” whereas the other type of competition is “for the market.” Network effect plays an important role in the later, as the network industries try to attract more users to gain a dominant position in the market. In such determination, it is important that the competition regulators take the market structure into equation before deciding on the relevant market. A Chicken-Egg problem, on the other hand, is stated as one in which a participant on one side of the market will be willing to participate to the platform activity only if he expects an adequate number of participation from the other side. For example, consumers would like to go for those credit cards, which are accepted by more merchants; similarly, merchants would like to join those platforms which have a large number of consumers. However, there are several two-sided markets that only perform the job of matching buyers and suppliers. Till the time enough number of both the participants are attracted to the platform, market makers are required, who try to resolve the temporary imbalance by standing in between the two parties i.e. they are willing to find out the existing problem to ensure smooth functioning of the platform.  The rise of e-commerce has again raised the age-old debate of inclusion of structural aspects of the market in the ambit of competition supervision. The first major school of thought to develop emerged at Harvard University when, in the 1930s, researchers conducted analyses of specific industries. In the middle of 20th century Harvard economists such as Edward Chamberlain, Edward Mason, Joe Bain argued that structure of an industry is essential to be looked into in order to examine competitiveness in the economy. The original insight of Harvard school developed a general theory that linked market structures to market performances, known as Structure-Conduct-Performance (SCP) paradigm stating that performance is determined by firms’ conduct, which is in turn determined by the market structure. According to the Harvard School approach, the regulators have to apply the presumption of illegality irrespective of the nature of the transaction. It is irrelevant if the said transaction is causing any benefits to the consumers, as the assessment is done on the performance of the entity and the existing structure in the market. On the other hand, the proponents of Chicago school consider consumer welfare as the utmost parameter in addressing competition concerns. With the advent of Chicago and the Post-Chicago school of thought, SCP had slowly lost its importance. Now as the markets get tangled and trickier, it is important that factors such as network effect should be considered as a relevant factor in tackling varied issues. 

SEBI engulfs non-monetary transactions - Extending the scope of Material Financial Relationships

This article is authored by Shubham Gupta

SEBI swerved on non-interference in Winding Up matters

This article is authored by Shubham Gupta, a 4th year student the Institute of Law, Nirma University.

Introduction

In the recent Adjudication officer (‘AO’) order dated on 31^st December2019, SEBI took a stand that it can proceed with the adjudication proceedings against a company even though the company is under liquidation. This stand is inconsistent with the approach adopted by SEBI till now and is likely to be non-est. in law.

In this matter of Rajadhiraj Industries Ltd., AO had initiated adjudication proceedings against Rajadhiraj Industries Ltd for non-redressal of investor grievances on SCORES platforms within the stipulated time, and failure to submit to Action Taken Report. When SCN notice was issued to the company, and it was found that company is into closure since 1996, and from MCA records, it was observed that the company has been provisionally wound up by the order of Indore High Court, MP. The appointed official liquidator informed AO that the company is under liquidation, and thus, no legal proceedings can be initiated against it.

Taking U-turn from the existing approach, AO ordered that it can proceed with the adjudication proceedings- banked on that the adjudication proceedings as to determine whether the SEBI laws were violated or not and, to impose penalty. Taking reference to the apex court judgment in SV Kondaskar, OL v VM Deshpande[1] – ruling that liquidation court would have full power to demand the penalty from the liquidator, AO held that adjudication proceedings wouldn’t be hampered by the appointment of an Official liquidator.

Analysis

At the outset, this order is contrary to stand taken by SEBI till now. Previously, the position in respect to adjudication proceedings was different and had a radical inclination towards the halting and  prohibiting the institution of any new proceedings by SEBI without the approval of the appropriate authority. Earlier, M/s Nova Surgikos Limited, the similar facts were arrayed with respect to non-redressal of SCORES complaints, and AO ordered the non-continuation of proceedings owing to the company is under liquidation. Likewise, in Everonn Education Ltd, yielding to the fact that liquidator has been appointed to overlook the affairs of the company, AO desisted from a continuation of the said proceedings owing to non-approval from the court. It was further reaffirmed in ABG Shipyard Ltd  that leave of the appropriate is a sine qua non for the continuation of the proceeding if the company is under liquidation, and thus proceedings against the company become not est.

Furthermore, arguably, this order is in direct conflict to Section 33(5) of IBC and Section 279 of Companies Act, 2013. Section 33 (5) IBC, 2016 envisages that in case of liquidation order is passed, no suit or proceeding shall be instituted against or by a corporate debtor whereas Section 279 CA, 2013 which states that  when a winding-up order is passed, no suits or other legal proceedings shall be instituted against the concerned company. Under IBC, an only liquidator with the prior approval shall institute suit against the corporate debtor, not any other creditor.[2] In Murgan Oil Industries (P.) Ltd. Re,[3] the word “suit” or “proceedings” not restricted to any class of creditors, or plaintiff and, it is wide enough to encompass all to cover all suits and other legal proceedings who-ever may be plaintiffs.

It is imperative that SEBI has also held that ‘adjudication proceedings’ are within the purview of ‘other legal proceedings’ under Section 446 of the Companies Act, 1956.[4] Thus, in no case, SEBI cannot institute or continue any suit or proceedings against the corporate debtor. Contrastingly, under Section 279 of the Companies Act leverages institution or continuation of suits or proceeding with the prior approval of the tribunal. Therefore, the whole purpose of IBC – to prevent the multiplicity of suits in the multiple forums – is questioned by this order.

It is to reiterate or reaffirm that, once the court has taken the assets of a company under its control or has passed an order for its being wound up, it will not be proper to allow proceedings to be started or continued against the company.[5] Thus, the regulatory proceedings by the various regulators would not only hamper the liquidation process but would intrinsically vitiate corporate structure in the market.

Conclusion

In the light of above, the appropriate approval under the Companies act must have taken by SEBI and therefore, it’s profusely against the spirit of the existing laws. This has again posed a serious question on ‘AO power to conduct adjudication proceedings. The regulators have been bestowed power which must be used cautiously and with all due regard to existing norms.

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[1] (1972) 1 SCC 438.

[2] Section 33(5), IBC

[3] 1970) 40 Com. Cases 77, 82 (Mad)

[4] Adjudication Order in respect of Lakhani India Ltd.,

[5] Central Bank of India v. Elmot Engineering Co., 1994 AIR 2358; 1994 SCC (4) 159

Splitting CEO’s Duality role: The landscape to independent Board Leadership ?

This article is authored by Shubham Gupta, a 4th year law student at the Institute of Law, Nirma University.

Introduction

In 2019, the Indian financial market has confronted many climacteric corporate issues like IL & FS, DHFL, Tata- Mistry, Infosys, etc. which appeal for a change in dynamics of corporate governance and compliance culture. In this regard, regulators and government bodies relentlessly fosters to adopt better compliance practices across the world. One of such advent interventions, the capital market regulator, SEBI vouched for separation of position of chairman and CEOs/ managing directors – which, in turn would cultivate a corporate democracy.

Separation of position and roles of the chairman of board and CEOs/Managing directors is assumed on the basis that the management look over the affairs of  the company whereas the board supervises the management, on behalf of the shareholders of the company. Essentially, this demand a non-aligned interest between the board and the management to have effective governance and management.

On the recent ruffling into the boards of Indian Listed Companies regarding SEBI’s rules on segregation of roles and position of chairman and executive/managing director- the hotly debated is again into clamour.[1] This article reinvigorates the debate over the dual role of CEOs and analyses the empirical literature available on this subject. In this regard, the author has emphasised two critical theories of corporate governance- agency theory which advocates for the separation of dual role; and stewardship theory which asserts the unity of command in a single person. Lastly, this article suggests the implication on the Indian Financial Market.

SEBI’s LODR Regulations : A breather for Listed Companies ?

In May 2018, The Security and Exchange Board of India (SEBI) brought in an amendment into Regulation 17, SEBI LODR (Listing and Disclosure Requirements), 2015 envisaging a separation of position of chairman and executive/managing directors,[2] with the aim to create an independent board while in the interest of better governance and compliance. This amendment has been captured on the recommendation of Uday Kotak Committee on Corporate Governance,[3] and is effective from to 1^st April 2020.

According to new rules, in 2018, SEBI has mandated that the top 500 listed companies (by market capitalization) must ensure that the chairman of the board and executive director are not the same.[4] Until yet 2020, 247 companies have not separated the position of chairman and executive director including RIL, Hindustan Unilever, etc.[5] This breather has been a stumbling stone to instil a better proposal for effective compliance. Behind time, this scenario, of course, ends up the corporations appointing dummy or titular chairman of the board, where CEOs/MDs will continue to exercise unfettered control over with some ineffective independent director on the board. Thus, this proposal may seem not to apply in letter and spirit where independent leadership has been aimed for.

Kotak Committee Recommendations: The power Conflict

Kotak Committee has recommended that a division of power of Chairperson (leader of the board) and CEO (leader of management) would provide effective supervision of the management and better segregation of responsibilities and duties. In most European, British, and Canadian businesses the roles are usually split in an effort to ensure better governance of the company, and in turn, bring higher returns to investors. However, in certain jurisdictions like US, this position is differently debated and corporation have been given discretion to separate the roles.  The power conflict to maintain position is seen to a sparkling debate amongst corporations.

Kotak Committee vogue for following reasons -

a) providing a structural advantage for the board to act independently;

b) reducing excessive concentration of authority in a single individual;

c) clarifying the respective roles of the chairperson and the CEO/MD;

d) ensuring that board tasks are not neglected by a combined chairperson-CEO/MD due to lack of time;

e) increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;

f) creating a board environment that is more egalitarian and conducive to debate.

Fostering Independence and Transparency – A Popular Opinion  

Aftermath the result of corporate scandals and the financial crisis, the reformers and, the investors have demanded functional independence by separating CEOs and Chairman jobs – while from the parlance of better corporate governance practices. Their argument is braced upon the agency theory which advocates that the CEO performs the management activities of the companies, while Chairman of the board looks into matters on behalf of the shareholders like hiring, compensation, and remuneration, etc., thus require their separation to instill corporate democracy.[6] Corporate democracy is an intertwined thread of management and board, and shareholders where the board supervises the management and report to the shareholders. Therefore, a separation would lead to better monitoring and oversight. If one person occupies both the roles, there would be a conflict of interest.

Besides, boards should ensure that the Chairperson be able to commit sufficient time to carry out his or her duties and responsibilities effectively. The duties and expected workload will vary according to the type, scale and, complexity of the organization. This augments that separation would lead to creating independence and transparency into the affairs of the company. Also, the best corporate governance system discourages the concentration of wealth on a single or a few individuals' hands who are managing the affairs of the company. The Corporate Governance Principles of the Organization for Economic Cooperation and Development (OECD-2015) also promotes the separation of the role of CEO and Chairman which will lead to improving discharging of responsibilities of the board under principle VI – Responsibilities of the Board Item E.[7]

At the outset, in India, where large-scale family-promoters run businesses is to be frowned upon where the transition from generation developed business leadership been witnessed. In India, severe financial irregularities have been observed in family-run businesses like in Satyam Scam. Thus, arguably bestowing power to an individual might lead to no flourishing governance, and maybe the rights of shareholders would have been prejudiced.

Does Separation ensure Independency?

The critics of this concept believe that mere separating a role or position wouldn’t ensure independence, both theoretically and empirically.[8] Arguably, having an independent chair does not necessarily seem to have an independent mindset, and in any case, a wise-CEO would have discussed disagreement with Chairman prior to going into a meeting. This would lead an anomalous result which is to be perceived by separating the roles. In one of the studies conducted in US Companies, despite a large number of separations between the position of CEO and Chairman of the board, it has been observed that only 16% of people have been observed as true independent chairman.[9] Thus, there is a shred of weak evidence[10] that independence and effective governance would increase. However, in total, 13 studies have been conducted, to determine whether separation would lead to independent board leadership and effective governance. Out of 13, ten inclined to show that separation has either positive or no effect on the performance of company or firm,[11] and only two have shown a negative consequence of it.

Admittedly, they have advocated stewardship or administrative theory which argues that the benefits of separating the chairman and CEO roles are not free from any blot and would suffer from a ‘unity of command’ in an individual which is essential for effective management and decision making. It advocates that the person must have clear and unambiguous authority, to which management can effectively report the affairs of the company. The same has been recently relied on by Rishabh Premji, the chairman of Wipro who had requested to remain on the executive position.[12] However, the board of Wipro has stated that ‘We will compile with SEBI Regulations’.

Analysis : Implications of Indian Financial System

According to one of the studies,[13] that apart from the structural attribute of the boards, the behaviour of the boardroom - what actually happens in the boardroom reflects the effectiveness of leadership. Thus, we must focus on behavioural studies of the board, rather a clinging separation between the roles. The specific industry knowledge of separate chairs, their leadership skills, and how they shape board process has received scant attention, and the pay-off must be to incorporate all these factors. The structural attribute of the board like managing dissent, conducive boardroom discussion and facilitating the synergy between board and management must be incorporated in policy or regulations.

In Companies Act, 2013, there is no clear line of segregation of roles and responsibilities of CEO and Chairman and Companies have given leverage to decide the roles and responsibilities according to their framework based on their organizational setup and size of the company. If the CEO-Chairman relationship is strong, which in turn provides company benefits from having twice as much from the talent at the top, each having distinct leadership roles. Combining the roles does have its advantages, such as giving the CEO multiple perspectives on the company as a result of their multiple roles, and empowering them to act with determination. This, however, avows a leeway into CEO’s act  may lead to  a way for corruption and scandal. However, the enduring problem is with the implementation – as Corporation hasn’t implemented it and likely to appoint mere dummy/titular chairman of the board with some ineffective independent director.

In India, the listed companies are being seen to be powered by a single shepherd that i.e. CEO. Corporation may unlikely to implement the law in letter and spirit, which again pose a peppering question: Does Independent Board Leadership exists? Thus, the regulator must seek to create an additional qualification for the appointment of chairman and relationship with the existing CEOs to implement the law in its letter and spirit.

Conclusion

From the standpoint of organizational prosperity, it is pertinent that companies to be managed effectively for long-term, and to create a sustainable value for shareholders. Separating the two positions strengthens the overall integrity of the company and encourages an environment of teamwork, communication and mutual respect.

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[1] Letter to BS: Splitting CMD role to help improve corporate governance, Business Standard (Jan. 09, 2020).

[2] Reg. 17 (d) (1B) SEBI (Listing Obligations and Disclosure Requirement) (Amendment) Regulations, 2018.

[3] Report submitted by the Committee on Corporate Governance, SEBI (Oct. 05, 2017).

[4] Reg. 17 (d) (1B) SEBI (Listing Obligations and Disclosure Requirement) (Amendment) Regulations, 2018.

[5] Over 200 big companies yet to split Chairman, MD roles, ET (Jan. 06, 2020)

[6] Separation of Chair and CEO Roles, Harvard Law School Forum on Corporate Governance, (Sept. 01, 2011).

[7] OECD (2015), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264236882-en

[8] Roshima H. Said, Zuraini Yaacob, Norasmila Awang, Jurina Ismail, Kamaruzaman Jusoff, “Chief Executive Officer duality and company performance: A case of Malaysian companies,” Interdisciplinary Journal of Contemporary Research in Business, 1(6), 2009, 120-142 at 124.

[9] SpencerStuart, “2009 Spencer Stuart Board Index,” October 2009.

[10] B. Ram Baliga, R. Charles Moyer & Ramesh S. Rao, “CEO Duality and Firm Performance: What’s the Fuss?” Strategic Management Journal, 17, 1996, 41-53.

[11] CEO Duality, Succession, Capabilities and Agency Theory: Commentary and Research Agenda Author(s): Dawn Harris and Constance E. Helfat Source: Strategic Management Journal, Vol. 19, No. 9 (Sep., 1998), pp. 901-904 Published by: Wiley Stable URL: https://www.jstor.org/stable/3094091 Accessed: 06-01-2020 13:08 UTC

[12] Wipro's Rishad Premji may lose executive chairman role due to new rules, Economic Times, Jan 2,  2020.

[13]  Separation of Chair and CEO Roles, Harvard Law School Forum on Corporate Governance, (Sept. 01, 2011).

Insider Trading Regime in India: Relevance of Mosaic Theory

This article is authored by Shubham Gupta, a 4th-year law student at Institute of Law, Nirma University

Insider trading is a serious white-collar crime in India. Insiders tend to manipulate the market movement by having the unpublished price sensitive information (UPSI) over the information available in the public domain. However, in India, certain aspects of USPI are still brusque and obscured in SEBI (PIT) 2015. In SEBI (PIT) 2015, the materiality of information is a key determinant factor that catalyzes insider trading. However, when the part of the non-material information is wiped out from an insider to an analyst which if collated with the generally available information would make the analyst in possession of Unpublished Price Sensitive Information, Indian legislation loses its sheen over this conditional situation.

Indian regime of Insider Trading is iced up on this issue and does not deliberate on this approach. In U.S. legislation, it has framed its approach regarding this issue of Insider Trading, namely Mosaic Theory of Materiality, but India is yet to begin its chapter. Tribunals and Courts have been unlettered on such issue, remarking a fundamental gap in determining the materiality of information. Many such cases are flowing in market and investor protection groups have failed to acknowledge the generous concern of Market effluence. This approach would not only soon find its space in India but will be lucidly deliberating on this approach to prevent insider trading. Rule of purposive interpretation would elucidate on this approach which deals with such significant ‘mosaic’ ovulated from a part of UPSI and a part of PSI.

In SEBI (PIT) Regulation, 2015, insider trading is an offense when there is a communication, counseling or procurement of UPSI from insider to non-insider, or when the trade has been done while in possession of UPSI. UPSI stipulated as any material information which is not generally available and which has a material effect on the price of securities listed or proposed to be listed. However, a part of UPSI is non-material in its sense but if collated with generally available information become material and create a significant mosaic of material information. This information which has been created through a matrix of information could be used by the analysts to do insider trading in the securities of a company and thus, regulations lose its efficiency. For e.g. if an analyst procured a part of UPSI through any means and collate it with the information already reeling in the market like media reports, press briefs, and public the announcement, but does brain-storming over the permutation and combination of the coming deal and trades while in the possession of this available information, would this act of trading amount to Insider Trading in India.

The fundamental issue revolves here is ‘Whether an analyst would be charged for the act of insider trading if he has edge over information due to his expertise skills and working on permutation and combinations of such half-received information’. This question has been marginally touched up by U.S. Court but failed to explain the cut and dried formula. In Elkind v. Liggett & Myers, Inc., U.S Court of Appeals in 2^nd Circuit address that any skilled analyst who has edge over information due to any use of any part of the non-material information, such procurement would amount to Insider trading. However, the U.S. had shown deviance from such approach in further cases. In Re Dirks, that an analyst may use UPSI which may be immaterial itself in order to fill in ‘interstices of analysis’; this process is legitimate even though ‘tidbit’ of such information may assume heightened significance when woven by the skilled analyst in the matrix of knowledge obtained elsewhere.

In Dirks v. SEC, the court acknowledged that the analyst must remain free to obtain information from the corporation to fill in the interstices in the analysis.  The rationale proof for this process is the skills and expertise employed by the analyst and essential for market efficiency. This information has not been merely gulped without the application of mind but due to his robust experience in the field. Therefore, this creates a serious doubt on the illegitimacy of such act. Thus, it would be a dilemma for Indian Courts to pope up according to the given jurisprudence in Securities Law because the SEBI Act and regulation thereof have been implemented with the purpose of market efficiency and investor protection.

Other facets that determine that materiality of information is such a situation is whether the disclosure of such omitted fact would be seen by the reasonable investor as significantly altered the total mixture of information available.[1] However, the debated jargon is ‘reasonable investor’. Whether the court must refer the ‘reasonable investor’ as in view of an ordinary investor or a sophisticated analyst having expertise in the market affluence. This aspect would pose a serious question ‘whether the skills and expertise employed by sophisticated analysts would rule over the interpretation of materiality in the evolving jurisprudence’.

The Courts or tribunals may view such a lurking question of the materiality of information, as the information obtained cannot be viewed in a vacuum and thus any kind of collation would amount to Insider Trading. However, the Rule of purposive interpretation avows that a liberal approach towards market efficiency because it reaffirms the established practice from which the benefit, relief, and remedy may flow. The striking outlook, here, is that the court or tribunals may resort to the purpose of enforcement of PIT regulations. That, so far as, the aspects of securities market concern, it is always a top-notch priority to protect investors from any kind of fraud. Therefore, the court should view such obtained information in the totality of the circumstances and whether the information is capable of changing the conclusive decision of the analysts in general. Not only, would this create a difference in a level of the approach adopted by an ordinary person and a skilled analyst, but significantly this would reform the existing modus operandi employed by other insiders including directors, promoters, KMP etc. by stimulating restrictive disclosure in the public or family events also.

The balance of mixed information and a UPSI must be addressed through a circumstantial approach in terms of ordinary categories in which such obtained information will create an asymmetry in the market. Sparingly, even information which is not material in nature but tends to become material in the near future must attract the prohibition of insider trading regulation.

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[1] Basic Inc. v Levinson