NAME: KRANAV KAPUR

ENROLNMENT NUMBER: A3221511019

PROJECT TOPIC: The Role of Stock Exchange in Corporate
Governance
COURSE: BBA.LLB (H), 8TH SEMESTER (2011-2016)
SUBMITED TO: DR. VIKAS GUPTA
SUBJECT: INVESTMENT LAW

INDEX

Serial
Number
1

Content

Page Number

DEFINITION OF CORPORATE
GOVERNANCE

THE ROLE OF STOCK

EXCHANGES
STOCK EXCHANGE HAVE
MULTIPLE ROLES IN THE
ECONOMY
RELEVANCE OF ROLE OF
STOCK EXCHANGES IN
CORPORATE GOVERNANCE

3-7

THE TRADITIONAL ROLE OF

EXCHANGES IN CORPORATE
GOVERNANCE

THE EVOLVING ROLE OF

EXCHANGES IN RESPECT OF
CORPORATE GOVERNANCE

8-10

INCREASING COMPETITION
AMONG STOCK EXCHANGES

11

ISSUES IN CORPORATE
GOVERNANCE: PAST &
PRESENT
GLOBAL PHENOMENA

11-12

REQUIREMENTS BY STOCK
EXCHANGE: (GLOBAL
PHENOMENA)
CONCLUSION

12-13

9
10

11

7-8

7-8

12

14
2

12

BIBLIOGRAPHY

15

DEFINITION OF CORPORATE GOVERNANCE1

The system of rules, practices and processes by which a company
is directed and controlled. Governance structures identify the
distribution of rights and responsibilities among different
participants in the corporation (such as the board of directors,
managers, shareholders, creditors, auditors, regulators, and
other stakeholders) and includes the rules and procedures for
making decisions in corporate affairs.
Since corporate governance also provides, it encompasses
practically every sphere of management, from action plans and
internal controls to performance measurement and corporate
disclosure.
Corporate governance includes the framework for attaining a
company's objectives, the processes through which corporations'
objectives are set and pursued in the context of the social,
regulatory and market environment. Governance mechanisms
include monitoring the actions, policies and decisions of
corporations and it encompasses practically every sphere of
management, from action plans and internal controls to
performance measurement and corporate disclosure. 2
THE ROLE OF STOCK EXCHANGES
India's SEBI Committee on Corporate Governance 3 defines
corporate governance as the "acceptance by management of the
1 http://corpgov.net/library/corporate-governance-defined/
2 http://www.corporategovernance.co.za/Home/CorporateGovernanceQuotes/tabid/148/Default.aspx
3 Report of the SEBI Committee on Corporate Governance dated February 8, 2003.
3

inalienable rights of shareholders as the true owners of the

corporation and of their own role as trustees on behalf of the
shareholders. It is about commitment to values, about ethical
business conduct and about making a distinction between
personal & corporate funds in the management of a company." It
has been suggested that the Indian approach is drawn from the
Gandhian principle of trusteeship 4 (it provides a means by which
the wealthy people would be the trustees of trusts that looked
after the welfare of the people in general. This concept was
condemned by socialists as being in favor of the landlords, feudal
princes and the capitalists, opposed to socialist theories) and the
Directive Principles of the Indian Constitution.
In the corporate governance area, there are few issues quite as
important as the role of stock exchanges in the governance
process. Stock exchanges can play a substantial or limited role in
the process. In the India, they are major players, requiring boards
with a majority of independent directors and various committees,
likewise staffed with independent directors. In that sense, the
NSE5 & BSE6 have a substantial regulatory role.
SEBI committee defined the objective of corporate governance as
the maximization of shareholders wealth keeping in mind the
interests of the other stakeholders. However, we must also ensure
that the interests of other shareholders are not getting affected in
the process.

4 Dr. Sundar SARUKKAI, Friday, 27 May 2005, 'The Idea of Trusteeship in Gandhi and JRD
Tata'

5 The National Stock Exchange (NSE) of India Limited is the leading stock
exchange of India, located in Mumbai. NSE was established in 1992 as the first
demutualized electronic exchange in the country.
6 Bombay Stock Exchange (BSE) is an Indian stock exchange located
in Mumbai, Maharashtra, India. Established in 1875 and is considered to be one of
Asias fastest stock exchanges.
4

Stock exchanges have multiple roles 7 in the economy, this

may include the following:
Raising capital for businesses:
The Stock Exchange provides companies with the facility to
raise capital for
expansion
through
selling shares to
8
the investing public.
Mobilizing savings for investment:
When people draw their savings and invest in shares, it leads to a
more rational allocation of resources because funds, which could
have been consumed, or kept in idle deposits with banks, are
mobilized and redirected to promote business activity with
benefits
for
several
economic
sectors
such
as agriculture, commerce and
industry,
resulting
in
a
stronger economic growth and higher productivity levels and
firms.
Facilitating company growth:
Companies view acquisitions as an opportunity to expand product
lines, increase distribution channels, hedge against volatility,
increase its market share, or acquire other necessary
business assets. A takeover bid or a merger agreement through
the stock is one of the simplest and most common ways for a
company to grow by acquisition or fusion. 9
7 Diamond, Peter A. (1967). "The Role of a Stock Market in a General Equilibrium
Model with Technological Uncertainty". American Economic Review 57 (4): 759776.
8 Gilson, Ronald J.; Black, Bernard S. (1998). "Venture Capital and the Structure of
Capital Markets: Banks versus Stock Markets". Journal of Financial Economics 47:
243277.
9 http://dcsbusiness.net/Economics/se/CentralBank2.html
5

Redistribution of wealth:
Stocks exchanges do not exist to redistribute wealth. However,
both
casual
and
professional stock
investors,
through dividends and stock price increases that may result
in capital gains, will share in the wealth of profitable businesses.
Corporate governance:
By having a wide and varied scope of owners, companies
generally tend to improve on their management standards
and efficiency in order to satisfy the demands of these
shareholders and the more stringent rules for public corporations
imposed by public stock exchanges and the government. 10
Consequently, it is alleged that public companies (companies that
are owned by shareholders who are members of the general
public and trade shares on public exchanges) tend to have better
management
records
than privately-held
companies (those
companies where shares are not publicly traded, often owned by
the company founders and/or their families and heirs, or
otherwise by a small group of investors). 11
Creating investment opportunities for small investors:
As opposed to other businesses that require huge capital outlay,
investing in shares is open to both the large and small stock
investors because a person buys the number of shares they can
afford. Therefore the Stock Exchange provides the opportunity for
small investors to own shares of the same companies as large
investors.
Government capital-raising for development projects:
10 http://www.corporategovernance.co.za/Home/CorporateGovernanceQuotes/tabid/148/Default.aspx
11https://azharbook.wordpress.com/the-role-of-stock-exchanges/

Governments at various levels may decide to borrow money in

order to finance infrastructure projects such as sewage and water
treatment works or housing estates by selling another category
of securities known as bonds. These bonds can be raised through
the Stock Exchange whereby members of the public buy them,
thus loaning money to the government. The issuance of such
bonds can obviate the need to directly tax the citizens in order to
finance development, although by securing such bonds with the
full faith and credit of the government instead of with collateral,
the result is that the government must tax the citizens or
otherwise raise additional funds to make any regular coupon
payments and refund the principal when the bonds mature. 12
Barometer of the economy:
At the stock exchange, share prices rise and fall depending,
largely, on market forces. Share prices tend to rise or remain
stable when companies and the economy in general show signs of
stability and growth. An economic recession, depression, or
financial could eventually lead to a stock market crash. Therefore
the movement of share prices and in general of the stock
indexes can be an indicator of the general trend in the economy. 13
Listing Requirements:
Listing requirements are the set of conditions imposed by a given
stock exchange upon companies that want to be listed on that
exchange. Such conditions sometimes include minimum number
of shares outstanding, minimum market capitalization, and
minimum annual income.

12 www.slideshare.net/rehan_ehsan/functionary-of-capital-market
13 http://www.yourarticlelibrary.com/stock-exchange/stock-exchange-of-indiafunctions-of-stock-exchange-of-india/23487/
7

RELEVANCE OF ROLE OF STOCK EXCHANGES IN

CORPORATE GOVERNANCE14
Stock exchanges have established themselves as promoters of
corporate governance recommendations for listed companies.
Demutualization and the subsequent self-listing of exchanges
have spurred debate on the role of exchanges. The conversion of
exchanges to listed companies is thought to have intensified
competition. And, the sharper competition has forced the
question of whether there is a risk of a regulatory ''race to the
bottom".15
Also exchanges are uneasy about the prospect of having to
continue performing their traditional regulatory and other
corporate governance enhancing functions amid a shrinking
revenue base. Therefore extension of role and wider responsibility
are always welcome.16

Following points show relevance of role

Exchanges in the Corporate Governance:17

of

Stock

1. Stock exchanges in the region developing rapidly; new

exchanges being established.
14 http://www.yourarticlelibrary.com/stock-exchange/
15 http://www.oecd.org/finance/financialmarkets/financialmarkettrendsno96volume20091-july2009.htm
16 http://www.world-exchanges.org/insight/views/role-stock-exchanges-corporategovernance
17
http://www.oecd.org/corporate/PrivatisationDemutualisationMENAStockExchanges.p
df
8

2. Stock exchanges remain government owned entities.

3. CG codes proliferating, some no longer voluntary.
4. Regulatory or enforcement powers of exchanges limited.
5. Room for strengthening of listing rules
6. Disclosure of listed companies requires further attention
7. No evidence of race to the bottom, need to align with industry
peers

THE TRADITIONAL ROLE OF EXCHANGES IN CORPORATE

GOVERNANCE
Historically, the main direct contribution of exchanges to
corporate governance has been listing and disclosure standards
and monitoring compliance. The regulatory function of stock
exchanges was in the past mostly limited to issuing rules and
clarifying aspects of existing frameworks. The standard-setting
role of stock exchanges was essentially exercised through the
issuance of listing, ongoing disclosure, maintenance and de-listing
requirements.18 On the enforcement side, stock exchanges have
shared their regulatory function with capital market supervisory
agencies. In addition to overseeing their own rules, stock
exchanges were assigned the role of monitoring the compliance
with legislation and subsidiary securities regulation. Since the
promulgation of the SEBI, stock exchanges have often enlarged
their regulatory role to embrace a wider palette of corporate
governance concerns.19 They have contributed to the
development of corporate governance recommendations and
encouraged their application to listed companies. The objective of
the following part of the article is to summarize these key

18 http://corporatelawreporter.com/2014/05/21/stock-exchange-corporategovernance/
19 http://www.corporategovernance.co.za/Home/CorporateGovernanceQuotes/tabid/148/Default.aspx
9

channels for exchanges contributions

governance in listed companies. 20

to

good

corporate

THE EVOLVING ROLE OF EXCHANGES IN RESPECT OF

CORPORATE GOVERNANCE

1. Exchanges act as a source of corporate governance related

regulation
Exchanges provide complementary rationales for establishing
themselves as a source of corporate governance-related
regulations21. In essence, by raising transparency and
discouraging illegal or irregular practices, exchanges are act as
regulatory authorities. The regulatory function of exchanges is
exercised in the context of an existing legal framework.
Exchanges' ability to introduce and enforce regulations is
obviously circumscribed by the authority of the relevant market
regulators. To the extent that the relevant laws or securities
regulation already address corporate governance of listed
companies, the role of exchange regulation can therefore only be
complementary.22 For instance, rules on prospectus issuance
follow largely from SEBI Prospectus Directive which may have
further limited the scope of standards setting by exchanges. Even
in jurisdictions where exchanges are empowered to issue
regulations, they may be subject to an approval by another
regulatory authority, e.g., in the India, proposed changes to
exchange rules must be filed with the SEBI.

20http://www.ifc.org/wps/wcm/connect/6ab71c8048a7e7b3accfef6060ad5911/Focus
_ENFCorpGov3.pdf?MOD=AJPERES
21 www.oecd.org/finance/financial-markets/43169104.pdf
22 www.sebi.gov.in/cms/sebi_data/attachdocs/1413803106939.pdf
10

2. Exchanges played a central role in the effective implementation

of national corporate governance codes
Corporate Governance is concerned with holding the balance
between economic and social goals and between individual and
communal goals. The corporate governance framework is there to
encourage the efficient use of resources and equally to require
accountability for the stewardship of those resources. The aim is
to align as nearly as possible the interests of individuals,
corporations and society.23One of the first among such endeavors
was the CII Code for Desirable Corporate Governance developed
by a committee chaired by Rahul Bajaj. 24 The committee was
formed in 1996 and submitted its code in April 1998. Later SEBI
constituted two committees to look into the issue of corporate
governance the first chaired by Kumar Mangalam Birla 25 that
submitted its report in early 2000 and the second by Narayana
Murthy three years later. The SEBI committee recommendations
have had the maximum impact on changing the corporate
governance situation in India. The Narayana Murthy committee
worked on further refining the rules. The Exchange has brought
about unparalleled transparency, speed & efficiency, safety and
market integrity.26 It has set up facilities that serve as a model for
the securities industry in terms of systems, practices and
procedures.

3. Compliance requirements
23 http://www.corporategovernance.co.za/Home/CorporateGovernanceQuotes/tabid/148/Default.aspx
24 www.laynetworks.com Journal of Management
25 www.moneycontrol.com/news-topic/kumar-mangalam-birla/
26 www.forbes.com/profile/nr-narayana-murthy
11

Listed companies have to comply with rules and regulations of

concerned stock exchange and work under the vigilance (i.e.
supervision) of stock exchange authorities. Clause 49 of the listing
agreement with stock exchanges provides the code of corporate
governance prescribed by SEBI for listed Indian companies. With
the introduction of clause 49, compliance with its requirements is
mandatory for such companies. Exchanges have played a
pioneering role in the development of the Indian securities
market.27

4. Awareness raising efforts have also played a role

Some exchanges have been actively involved in increasing the
awareness around the value of good corporate governance. For
instance, The National Stock Exchange (NSE) a leading stock
exchange covering various cities and towns across the country
has established & organized training sessions and other
educational projects in order to increase the awareness of
securities market & good governance practices and the Code of
Best Practice for Listed Companies. Such programmers not only
serve the general public but also require corporates to maintain
good governance in light of investor awareness. 28 In the same way
an equally important accomplishment of BSE Limited is its
nationwide investor awareness campaign - "Safe Investing in the
Stock Market" under which awareness campaigns and
dissemination of information through print and electronic medium
is undertaken across the country.29 BSE Limited also actively
promotes the securities market awareness campaign of the
Securities and Exchange Board of India. 30
27 www.researchgate.net/...Corporate Governance.
28 www.ficci.com/sector/3/Add_docs/bank-Digest-September.pdf
29 https://stockmarketifo.wordpress.com/page/2
12

INCREASING COMPETITION AMONG STOCK EXCHANGES

While competition among stock exchanges is not new, it has
intensified in recent years in various areas of exchange activities,
including trading, listing and settlement. In addition to the
obvious effects of demutualization and listing of exchanges, a
rapid improvement in information technology and the creation of
innovative financial instruments have also been among the key
factors.31 In consequence, the traditional view of exchanges as the
controllers of at least some has been severely shaken.
Exchanges are increasingly seen as providers of specific services
in competitive markets, which include trading, but may or may
not include settlement and other activities. 32
Moreover, the scope of competition has broadened from the
national to the international level. While yesterday's competitors
were, for example, domestic exchanges such as NSE and BSE,
today's competition is between large consolidated groups
operating in an internationalized financial market place. 33 The
emergence of international exchange groups in fact mirrors the
evolution of the listed companies sector itself. Historically, the
focus of exchanges was on attracting domestic issuers, which
encouraged competition for listings among different national
exchanges. As this focus has shifted on attracting large
international companies, including foreign ones, exchanges' basis
of operations has shifted accordingly. Competition between
30 reverseflashback.blogspot.com/p/bombay-stock-market.html
31 www.cfapubs.org/doi/pdf/10.2469/ccb.v2007.n7.4819
32 cssmriti.blogspot.com/2012/07/role-of-stock-exchange-in-corporate.htm
33 www.exchangetradedfunds.com/helpmedothenews09AP.php
13

exchanges, both for domestic and foreign listings, has therefore

intensified.34
ISSUES IN CORPORATE GOVERNANCE: PAST & PRESENT
Effective corporate governance provides for more efficient
allocation of resources, as the return on assets in countries with
the highest levels of corporate governance is double that of the
return on assets in countries with the lowest levels of corporate
governance. India has been proactive throughout its past 20 years
of economic liberalization in bringing regulations to help foster
effective corporate governance that contributed to its economic
growth.35
GLOBAL PHENOMENA
The OECD Steering Group on Corporate Governance has
embarked on a project on The Role of the Stock Exchanges in
Corporate Governance suggesting a number of issues arising from
recent changes in the role of the exchanges. The role of
exchanges in corporate governance has also been examined in
work with non-member countries and further work on this topic is
foreseen in the context of the Asian and Latin American Corporate
Governance Roundtables.36
Other international organizations and industry groups have also in
recent years considered stock exchanges regulatory functions,
and the closely related topic of competition between exchanges.
This includes work by the International Organization of Securities
Commissions (IOSCO)37 in 2006 as well as the World Federation of
Stock Exchanges (WFE)38 has so far been addressed only
34 www.oecd.org/finance/financial-markets/43169104.pd
35 www.law.stanford.edu/courses/current-issues-in-corporate-governance
36 www.oecd.org/dataoecd/3/10/43056196.pdf
14

tangentially.39 Independent academic literature, on the other

hand, has addressed some of the issues of this article. Ever since
the first demutualization of an exchange (Stockholm in 1993)
studies
of
listing,
competition,
consolidation
and
internationalization of exchanges has become a rapidly growing
industry.
REQUIREMENTS BY STOCK EXCHANGE: (GLOBAL PHENOMENA)
Companies have to meet the requirements of the exchange in
order to have their stocks and shares listed and traded there, but
requirements vary by stock exchange:
London
Stock
Exchange: The
main
market
of
the Exchange has requirements for a minimum market
capitalization (700,000), three years of audited financial
statements, minimum public float (25 per cent) and
sufficient working for at least 12 months from the date of
listing.40
NASDAQ Stock Exchange: To be listed on the NASDAQ a
company must have issued at least 1.25 million shares of
stock worth at least $70 million and must have earned more
than $11 million over the last three years. 41
37 The International Organization of Securities Commissions (IOSCO) is an
association of organizations that regulate the worlds
securities and futures markets.
38 The World Federation of Exchanges (WFE), formerly the Federation
Internationale des Bourses de Valeurs (FIBV), or International Federation of Stock
Exchanges, is the trade association of 64 publicly regulated stock, futures,
and options exchanges.
39 "About WFE". World Federation of Exchanges (WFE). Retrieved 23 August 2013
40 http://www.nyse.com/Frameset.html?displayPage=/listed/1022540125610.html
15

 New York Stock Exchange: To be listed on the New York

Stock Exchange (NYSE), for example, a company must have
issued at least a million shares of stock worth $100 million
and must have earned more than $10 million over the last
three years.42
Bombay Stock Exchange:
Bombay Stock Exchange (BSE) has requirements for a
minimum market capitalization of Rs.250 Million and
minimum public float equivalent to Rs.100 Million. 43

CONCLUSION
Development of norms and guidelines are an important first step
in a serious effort to improve corporate governance. The Ministry
of Corporate Affairs has proposed the New Companies Bill 2008
which aims to improve corporate governance by vesting greater
41 NASDAQ Corporate -NASDAQ Listing Information
42 "NYSE Composite Index". Retrieved 9 June 2014
43 http://www.world-exchanges.org/statistics/monthly-reports
16

powers in shareholders.44 These have been balanced by greater

emphasis on self-regulation, minimization of regulatory approvals
and increased and more transparent disclosures. The existing
(Clause 49)45 and ensuing (The Companies Bill, 2008) legislations
do cover the fundamentals of effective corporate governance and
India compares favorably with most other developing and Asian
economies as far as the adequacy of corporate governance
regulations are concerned.46 Improved corporate governance,
however, does not solely rest on control through increased
regulations. The bigger challenge in India, however, lies in the
proper implementation of those rules at the ground level. In India
at present there are 23 recognized stock exchanges along with
NSE & BSE playing a prominent role in carrying out objectives of
SEBI rules, regulations & guidelines in true letter and spirit. 47

BIBLIOGRAPHY

44 www.mca.gov.in/Ministry/pdf/annualreport_2012_2013.pdf
45 www.sebi.gov.in/commreport/clause49.htm
46 www.amchamindia.com/cg_survey_report.pdf
47 www.icsi.edu/WebModules/LinksOfWeeks/CS_NOV2013.pdf
17

OECD Document on Role of Stock Exchanges in Corporate

Governance by Hans Christiansen & Alisa Kolderstova.
www.sebi.gov.in/commreport/clause49.htm
Official website of Bombay Stock Exchange
(http://www.bseindia.com)
http://www.yourarticlelibrary.com/stock-exchange/stockexchange-of-india-functions-of-stock-exchange-ofindia/23487/
https://azharbook.wordpress.com/the-role-of-stockexchanges/
Official website of National Stock Exchange
(http://www.nseindia.com/)
www.mca.gov.in/Ministry/pdf/annualreport_2012_2013.pdf
http://www.world-exchanges.org/statistics/monthly-reports
www.laynetworks.com Journal of Management
Official website of National Stock Exchange
(http://www.nseindia.com/)

18