To increase the bar on corporate governance, the National Stock Exchange has launched NSE Prime

The NSE Prime framework was created by India’s biggest stock market, the National Stock Exchange, to promote corporate governance. The project aims to inspire businesses to go above and beyond what regulatory authorities need and build stronger governance processes.

Why is it necessary for India to improve its corporate governance standards?

With the influx of local and foreign investors into India’s stock markets in recent years, corporate governance has become a major problem for public corporations. Companies often obey corporate governance regulations in word but not spirit. As a result, a voluntary corporate governance framework might assist Indian businesses in communicating that they follow strong corporate governance practices.

Corporate governance, or rather the lack thereof, has been a point of dispute between promoters and shareholders in recent years. Shareholder resistance has caused some firms’ management compensation resolutions to fail, as shareholders believed the remuneration was not in line with company success.

Other issues to be concerned about include a lack of really independent directors, self-serving resolutions, tiny boards, lack of disclosures, high linked party transactions, conflicts of interest, and other issues. When compared to comparable enterprises, companies with corporate governance concerns often obtain lower values. As a result, the NSE is attempting to make investing simpler by establishing a distinct structure.

Other countries have similar frameworks

The Quoted Firms Alliance in the United Kingdom provides a list of optional corporate governance-related disclosures for companies that trade on the stock markets.

The Brazilian stock market implemented a voluntary compliance system to tighter criteria in the year 2000. When compared to the exchange’s benchmark index, the index of businesses registered under the tougher governance structure has provided better returns.

Investors would clearly prefer to invest in firms with higher corporate governance standards if all other factors were equal. The system known as the Novo Mercado model did not see considerable activity until 2004, when Novo Mercado listings accounted for the bulk of listings. The approach aided in instilling trust in Brazilian markets and firms that adhered to the framework’s standards.

Which businesses are eligible for NSE Prime?

Only corporations with public shareholders owning 40% or more of the total outstanding shares would be eligible for the Prime structure. The market regulator, the Securities and Exchange Board of India (SEBI), however, stipulates minimum public ownership of just 25%. Promoters will find it more difficult to pass special resolutions that need at least 75% of votes in favour of larger public ownership.

In addition, the corporation would need to have a minimum of eight board members and a maximum of fifteen board seats to join the framework. In contrast to the Prime framework’s minimum of eight board members, the SEBI only required six.

Overall, the approach would increase openness, power allocation among executives and investors, and perhaps board independence. The NSE might compile a list of firms that fulfill the requirements and construct an index for investors concerned about corporate governance.

India is pressing for more stringent corporate governance regulations

In recent years, regulators, governments, and market infrastructure businesses seem to have increased their drive for transparency and corporate governance. The government is also considering changing the legislation governing Chartered Accountants in order to hold auditors responsible for their conduct.

To prevent investors from being deceived, SEBI has been enacting changes to make listed companies more transparent. For example, a recent SEBI recommendation suggested that general justifications for collecting money via initial public offerings (IPOs) should be restricted, and the specifics regarding how the proceeds would be used should be specified explicitly.

With the launch of Prime, we may see more firms embrace higher requirements as ESG factors become more important to bigger investors. Higher corporate governance rules might make fundraising simpler and, in the long run, assist to build value for investors.