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Friday, Jul 12, 2002

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`Corporate governance ratings can curb frauds'

N.K. Kurup
Virendra Verma

MUMBAI, July 11

CAN corporate governance ratings help prevent companies or their managements from committing fraud? Yes, if the rating is based on a "suitable model," believes Mr G.N. Bajpai, Chairman, Securities and Exchange Board of India (SEBI).

The capital market regulator is now advocating an ethical approach to corporate governance rating. Mr Bajpai suggests the development of a comprehensive model for rating the corporate governance practices of India Inc.

"We need to develop an appropriate instrument that can assess the standards of corporate governance not only on the basis of compliance with rules and regulations but also with the principles behind them," says Mr Bajpai.

The rating should ensure that the implementation of the codes of corporate governance should be true in both letter and spirit, he said.

According to Mr Bajpai, merely getting the auditors to follow the accounting norms will not solve the problem. "Remember, this is also an issue of ethics....auditors should follow the accounting norms true to their letter and spirit," he said in an informal chat with Business Line.

This concern over corporate ethics appears to be prompted by the recent financial scandals that have hit corporate America, and also by the view that the compliance levels of corporate governance in India are far below the desired levels, says an analyst with a consulting firm.

The Government is now talking about more stringent regulations for compliance with corporate governance norms. The Prime Minister and the Finance Minister are talking about it.

The question is how to ensure that the men who manage corporates follow these rules? It was not the lack of rules that led to corporate scandals in the US, but the non-compliance with them.

The issue here is one of honesty and integrity of the corporate management, the analyst says.

Rating agency ICRA has already started offering corporate governance ratings (CGR) to listed companies. According to ICRA, its CGR is based on core principles of corporate governance practices laid down by the business sector advisory group of OECD.

These principles are: fairness, transparency, accountability and responsibility.

While evaluating an organisation on the CGR scale, ICRA would consider whether the codes and guidelines have been followed just for statutory compliance or whether the organisation has implemented the concept of corporate governance in spirit as well.

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