Why This Framework?
From Satyam Computers in 2008 to Manpasand Beverages and Cox and Kings at present, lapses in corporate governance practices have been an area of concern for corporate India and its shareholders. Shareholders are the last ones who are updated about the malpractices. And by the time they come to know, the destruction has been done. Hence NSE has come up with this framework for the greater good!
To raise the bar, the NSE is emulating Brazil’s successful Novo Mercado (new market), a listing category that includes shares of companies that agree to adhere to higher standards than those required by law. NSE will give an option to the eligible companies to sign up for the ‘Prime Membership’.
Who All Are Eligible Candidates?
A listed company will need to have at least 40% public shareholding. The Securities and Exchange Board of India (SEBI), on the other hand, requires merely a 25% public shareholding. Additional requirements include a minimum of eight and a maximum of 15 board seats.
Also, for prime memberships, the managing director of the company and its chairman should not be related. The promoters of the company will also need to disclose the financial health of other companies in which they exert control. Board members of NSE Prime companies cannot serve on the boards of more than five listed companies.
Results from Brazil
This framework was initially introduced by Brazil’s leading bourse in 2000. Since then, the platform ‘Novo Mercado’ has become the new standard for aspiring companies. Also, the majority of new listings in Brazil over the past decade have been on this segment, and foreign funds have preferred to trade in companies listed on this segment.
An interesting thing to note is that Brazil’s bourse also created an index based on ‘Novo Mercado’, which has consistently outperformed Brazil’s benchmark ‘Ibovespa’.
What’s in Store for Investors?
It’s a win-win for investors as companies who voluntarily list on this segment will have fair business practices, and shareholders need not worry much about every rumour out there. Who knows, a few years down the line, the NSE may even consider coming out with an index based on the prime membership!
The NSE’s intent is clear. And hence it has decided to proceed further with the proven Brazilian model where companies are now ascribing to list on this new segment. Hope it plays out well in India too!
The Way Forward
“Improved corporate governance standards, greater transparency and better disclosures will help companies build stronger and sustainable businesses that can stand the test of time,” said the managing director of the NSE.
Companies that are a part of NSE Prime would be viewed more favourably by ESG funds as ethical investing is gaining importance in the world.