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The Securities Contract (Regulation) Act, 1956 u/s 21 recognises that, ‘Where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange’; and Section 9(2)(m) thereof recognises that stock exchanges have by-laws wrt listing. When Securities and Exchange Board of India (SEBI) came into the picture in 1992, it recognised the need to regulate not just listing of the security but to regulate the internal workings of the listed company to ensure ‘good governance’. The 1999 Report of the Committee appointed by SEBI on Corporate Governance under the chairmanship Kumar Mangalam Birla itself recommended that, ‘SEBI writes to the Department of Company Affairs for suitable amendments to the Companies Act in respect of the recommendations which fall within their jurisdiction.’, without actually identifying in detail the various issues that fall within Central Government domain. This resulted in the most prolific Clause 49 of the Listing Agreement. This was done by regulating the Listing Agreement by requiring amendments thereto by issuing SEBI Circulars.

Thereafter, SEBI set up the Committee on Corporate Governance under the chairmanship of Shri N. R. Narayana Murthy. Its 2003 Report vastly expanded on these corporate governance measures to be included in the listing agreement. By now the listing agreement had virtually supplanted the provisions of the Companies Act, 1956 in many areas, especially Composition of Board of Directors, its Committee’s, voting mechanism, related party approvals etc. This growing concern was recognised and sought to be dealt with by recommending, ‘Harmonization. It was suggested that SEBI should work towards harmonising the provisions of Clause 49 of the Listing Agreement with those of the Companies Act, 1956. The committee noted that the major differences between the requirements under Clause 49 and the provisions of the Companies Act, 1956, should be identified. SEBI should then recommend to the Government that the provisions of the Companies Act, 1956, be changed to bring them into line with the requirements of the Listing Agreement.’

Thus, the approach was to bring Parliamentary Law in line with a Listing Agreement, an approach that any constitutional lawyer would frown upon and it would have been ideal for the ‘corporate governance’ aspect of Listing Agreement to not be implemented till it was in line with Parliamentary law. This was recommended just after Section 55A was inserted into the Companies Act, 1956 by the Companies (Amendment) Act, 2000 to empower SEBI to administer specific provisions relating to the issue and transfer of securities and non-payment of dividends in respect of companies that are under listing obligation. In all other aspects of a listed company, as well as unlisted companies (not under listing obligation) the Central Government continued to be the regulator for all corporate affairs. This position has continued even under the Companies Act 2013, which provides for similar distribution of power under section 24 thereof.

Thus, it was clear from the start that SEBI was nothing more than the ‘market regulator’ and not the ‘corporate affair regulator’ for listed companies. Yet under the compulsion of listing the companies were made to comply with enhanced obligations in respect ‘corporate governance’, and these provisions are virtually parallel and place a higher compliance burden vis-à-vis Companies Act, 2013 provisions. Section 32 of the SEBI Act only provides that the SEBI Act is not in derogation but in addition to other laws. This does not mean that, under the guise of making subsidiary legislation under the SEBI Act and other securities statutes, the jurisdiction of SEBI can be expanded to overreach Section 55A/Section 24 of the relevant corporate law enactment. Section 32 of the SEBI Act will only operate within the jurisdictional domain of SEBI, rather than to enhance and widen the jurisdiction of SEBI so as to supplant the Companies law enactment.

Similar attempts to widen the scope of listing agreement into corporate governance affairs have been resisted even in other jurisdictions. In Alliance for Fair Board Recruitment; National Center for Public Policy Research v. SEC, No. 21-60626 slip op. at 5 (5th Cir. 2024); WL 670403, the US Court of Appeals struck down the Nasdaq exchange listing rule approved by the SEC which dictated companies listed on it should disclose information about the racial, gender, and sexual characteristics of their directors, or explain why they do not have at least two directors who meet NASDAQ’s definition of “diverse”. In short, the court held that the mandating board diversity or disclose reason why diversity was not there as a rule had nothing to do with the purposes of the SEC, which were primarily to protect investors or public interest and to protect market from speculative, manipulative, and fraudulent practises and to promote just principles of trade and competition in the securities market transaction. It specifically held that, ‘That is not to say that everything SEC does to regulate Nasdaq automatically implicates a major question. But prescribing rules such as these, which attempt to transform the internal structure of many of the largest corporations in the world, surely will stop. Such rules come close to regulating the entire economy. … All the SEC can do is point to “a vague statutory grant” clause in the Exchange Act. It gestures to language such as “just an equitable principle of trade,” or to its mandate to “perfect the mechanism of a free and open market,” and to adopt rules “designed…, in general, to protect investors and the public interest.” In all contexts, these provisions could be rendered “empty vessels” for the SEC to exercise nearly unlimited regulatory authority.’

While that may be the law in the USA; The Indian law must be examined in the context of Section 55A/Section 24 of the relevant company law enactment and the specific provisions of the SEBI Act that grant SEBI the power of corporate governance, which it now seeks to regulate directly by incorporating and expanding the erstwhile Clause 49 of the Listing Agreement into Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 [SEBI (LODR) Regulations, 2015]. The Listing Agreement is now reduced to a few pages in the format specified by SEBI by way of Circulars, essentially requiring the issuer seeking listing to agree to comply with exchange by-laws, the SEBI (LODR) Regulations, 2015 and other securities laws.

The author is of the view that the SEBI is only a market regulator in respect of securities issued by issuers under a listing obligation, and only in the specific instance of registered intermediaries and recognised stock exchanges and clearing corporations, it is, in fact, a sectoral regulator regulating their work. This becomes clear from Section 11(2)(b), (ba) & (c) of the SEBI Act which uses the phrase ‘registering and regulating the working of’ and ‘regulating the business of’ SEBI registered intermediaries and recognised exchanges, etc. Similarly, Section 11B authorises SEBI to issue directions to ‘prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interest of investors or securities market’ and ‘to secure the proper management of any such intermediary or person,’ entirely in the context of persons requiring registration u/s 12. Nothing in the SEBI Act authorises the SEBI to regulate the inner workings of a listed company and this must be seen as a deliberate omission of Parliament given the specific provisions in Companies Act to regulate companies; thus, howsoever laudable the object to be achieved and yet regulations and circulars have been issued by the Board since 1999.

Interestingly, SEBI has taken the stand before the Hon’ble Supreme Court in Pramod Jain & Ors. v SEBI, [2016 (10) SCC 243 : 2017 (139) SCL 28 (SC) : 2016 (10) SCALE 513 : 2016 (199) CompCas 440 (SC)], that it only regulates the securities markets and issues relating to mis-management of listed companies are to be dealt under the company law enactments by the company court (now National Company Law Tribunal) and not it.

The Supreme Court in Raymond Synthetics Ltd. & Ors. v Union of India & Ors. [1992 (2) SCC 255 : AIR 1992 SC 847 : 1992 (1) SCR 481] has explained the concept of listing as “Listing means the admission of securities of a company to trading privileges on a stock exchange. The principal objectives of listing are to provide ready marketability and impart liquidity and free negotiability to stocks and shares; ensure proper supervision and control of dealings therein; and protect the interest of shareholders and of the general investing public.”

Listing originated in the context of a public issue of shares; shares are goods as well as a bundle of rights to be exercised by the share-holder. In view of the principle of caveat emptor, the securities laws came to evolve a disclosure regime, so that the investor in shares had material information to undertake the sale-purchase of shares had & exercise of his rights as long as he held the shares. Thus, the company seeking listing of its shares is required to disclose all material information in its prospectus inviting subscription; further, continual disclosures are mandatory to enable the conscious exercise of bundle of rights such as voting rights, qua the Issuer company which the shares represent. It is in this context that a disclosure regime is to be understood. Listing conditions invariably exist to ensure appropriate disclosure of material information to investors in all those jurisdictions where the securities markets are based on disclosure regime. Listing conditions are not envisaged as a backdoor to enable the securities regulator to undertake regulation of those provisions of company law which are meant to be exclusively administered by the Central Government under the pretext of regulating corporate governance or the specious argument of primacy of special law. In a disclosure regime, the securities regulator ensures that all material information, good as well as bad, is disclosed. It is the investors whose decisions impact the prices & thereby act as a market force driving investment towards companies which have better corporate governance over those that don’t. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 represents a failure to understand the philosophy behind the repeal of the Capital Issues (Control) Act, 1947. It is not the mandate of the securities regulator to ensure corporate governance through regulation making, rather that is to be achieved through market forces shaped by informed investor choices while investing, disinvesting, etc, hence the importance of ensuring timely and appropriate material disclosures. The present situation is worse as compared to the control regime under the Capital Issues (Control) Act, 1947 which purported to ‘control’ the issue of securities; SEBI has moved towards the ‘control’ of Issuer company itself under the pretext of compliance with listing conditions at the time of issue of securities and continued listing of securities.

Even though SEBI obtained statutory recognition in 1992, till 2000 the regulatory boundaries of SEBI and Central Government qua company law was not clear. However, since the insertion of section 55A in the Companies Act, 1956 the jurisdiction between the two was clearly delineated by Parliament. The Companies Act, 2013 is better organised and section 24 of the Companies Act, 2013 is even more explicit. Chapters III & IV of the Companies Act, 2013 & section 127 in so far as they relate to issue and transfer of securities & non-payment of dividend are administered by SEBI (except as otherwise provided e.g. registration of prospectus is administered expressly by the Central Government). Whereas provisions relating to schemes of arrangement are contained in Chapter XV of Companies Act, 2013 and thus meant to be administered by the Central Government. The Companies Act, 2013 is a general law consolidating and restating the law relating to companies and certain other associations; there is no dispute that it will give way to the provisions of a special enactment. However, the SEBI Act, 1992 does not occupy every field covered by the Companies Act, 2013 and hence the Companies Act, 2013 would prevail in respect of those issues which are not covered under the SEBI Act, 1992. [See, Union of India v Information Technologies (India) Ltd. & Ors., 2009 (151) CompCas 337 (CLB) : MANU/CL/0035/2009; and SEBI v Ikisan Ltd., 2016 (132) CLA 223 (Bom) : 2015 SCC Online Bom 6358 : 2016 (195) CompCas 325 (Bom) : MANU/MH/2525/2015]

Today, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 either virtually reiterate or modify many provisions of the Companies Act, 2013 which are meant to be administered exclusively by the Central Government, such as, –

1. Composition of Board of Directors;
2. Cap on Directorships;
3. Audit;
4. Vigil mechanism;
5. Related party transactions;
6. Corporate governance of subsidiary of issuer;
7. Obligations of Independent Directors;
8. Scheme of Arrangement;
9. Change in name of Issuer.

Today the listing regulations are no longer regulating just listing and trading of securities but also regulate the regular internal functioning of companies. This can be seen especially in the case of schemes of arrangement. Take for example, schemes of arrangements are privately negotiated deals between a listed company and the creditors the Companies Act, 2013 or the erstwhile Companies Act, 1956 do not envisage that the draft scheme must be first approved any stock exchange (or seeking comments of SEBI before filing); they only envisage that the scheme is to be filed directly with the court and then objectors such as SEBI (under the 2013 Act) be issued notice who must approach the Company Court for consideration of objections. Unfortunately, time and again the Board has tried to mandate that the scheme of arrangements must first be tested for compliance of securities laws and only thereafter be filed with the Company Court. This was first done by requiring prior stock exchange approval as a condition of listing in the Listing Agreement. This approach was disapproved by the Calcutta High Court in Re: Quippo Infrastructure Equipment Ltd. & SREI Infrastructure Finance Ltd.  2011 (2) CompLJ 279 (Cal) : MANU/WB/0229/2011 : 2011 SCC OnLine Cal 147, [Also see, Pentamedia Graphics Ltd. v Bombay Stock Exchange, 2008 (145) CompCas 327 (Mad) : MANU/TN/7566/2006; Jindal Securities Pvt. Ltd. & Ors. v Sistema Shyam Teleservices Ltd. & Ors., 2015 (127) CLA 65 (Raj): MANU/RH/0037/2015 : 2015 SCC OnLine Raj 1139, affirmed in: Jindal Securities Pvt. Ltd. & Ors. v Sistema Shyam Teleservices Ltd. & Ors., MANU/RH/1356/2015 : 2015 SCC OnLine Raj 2073] in the following terms:

“Clause 24(f) of the Listing Agreement is pointed out by the learned counsel for the Calcutta and Bombay Stock Exchange. Clause 24(f) reads as follows: 

“(f) The company agrees that it shall file any scheme/petition proposed to be filed before any Court or Tribunal under sections 391, 394 and 101 of the Companies Act, 1956, with the stock exchange, for approval, at least a month before it is presented to the Court or Tribunal.”

It is submitted that since these stock exchanges did not approve the scheme, it could not be presented before the court and for that reason the application for sanction of the scheme should be dismissed. I think this is a bad argument. First of all, the Act and Rules do not provide for approval of any stock exchange being taken before the scheme is to be presented before the court. There is neither any requirement in the SEBI Act or any Rule or regulation thereunder. Any stock exchange cannot be allowed to argue that because it has not approved the scheme, the court loses its power to consider it for approval. This stipulation in the agreement is to be read as furnishing a copy of the proposed scheme to the stock exchange for its information and objection.”

The observations of the Hon’ble Bombay High Court in In re, Chemidye Manufacturing Co. (P) Ltd., 2006 (69) SCL 10 : 2004 (134) CompCas 58 (Bom) are even wider; sections 391 to 393 of the Companies Act, 1956 apply to listed and unlisted companies equally and are not controlled by the Listing Agreement & the Securities Contracts (Regulation) Act, 1956. In which case even, the subsequent attempt to create regulations would be invalid, since what could not be done the statute cannot be done by way of regulations under the same statute. Yet from time to time, the Board issued circulars [See, SEBI Circular No. CFD/DIL3/CIR/2017/21 dated 10.03.2017, amended from time to time] and thereafter vide Regulation 11, 37 and 94 of SEBI (LODR) Regulations, 2015 essentially recasting the obligation contained in the Listing Agreement into a statutory framework. This was done notwithstanding the fact that SEBI was not authorised to exercises its powers in this regard as section 24 of the Companies Act, 2013 has not given the Board the power to administer and frame regulations in respect of those provisions of Companies Act, 2013.

This creates another problem. Thus, while the Parliament has time and again the evinced a desire to de-criminalise various violations of the Companies Act, 2013 through amendments thereto, such attempts are entirely vitiated since it is possible that for the same obligation in the Companies Act, 2013 the Board may have created a mirror or modified provision in the SEBI (LODR) Regulations, 2015; the violations of these regulations is punishable not only with civil penalties but also with imprisonment upto 10 years as well as with fine upto Rs. 25 crores. Thus, any attempts by Parliament to de-criminalise violations corporate law violations are laid to waste by the present SEBI (LODR) Regulations, 2015. The sword of prosecution under parallel provisions of the SEBI (LODR) Regulations, 2015 continues to dangle upon companies undertaking listing of their securities.

All subordinate legislation, including regulations must confirm to the scheme of the parent statute. Section 30 of the SEBI Act, 1992 [and analogous provisions of the Securities Contracts (Regulation) Act, 1956] makes it clear that the regulations must be consistent with the Act and must be for carrying out the purposes of the Act. A subordinate legislation made under the power to ‘carry out the purposes of the Act’ which does not relate to any purpose of the Act or brings into existence ‘substantive rights or obligations or disabilities not contemplated by the provisions of the Act’ will be invalid.

However, the unconstitutional position has continued for so long only because, the listed companies have no choice but to fall in line to get their securities listed and since the circulars and regulations are enforced by the threat of penal action including huge penalty, fines and prosecution under the Act. This is not to say that nothing good has come out of this whole exercise, many aspects of the Listing Agreement were infact incorporated by the Central Government into the Companies Act, 2013. However, good intentions and constitutionality of SEBI (LODR) Regulations, 2015 are two different aspects that may get tested in coming years given the breadth and weight of compliance burden now being imposed on listed companies.

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-Chaudhary Suraj, Advocate Bombay High Court