The Hindu Business Line : Corporate governance

Be it attracting foreign investors or joint venture partners, good corporate governance is a key factor. There are a plethora of reasons for lacklustre corporate governance compliance by Indian companies.

Vikas Varma

The Securities and Exchange Board of India (SEBI), in designing corporate governance norms for India, has made considerable effort to take from the best practices in leading equity markets around the world.

A matter of choice

Clause 49 of the Listing Agreement was formally instituted with all its reforms in 2005 and all listed companies were to comply with it by January 1, 2006.

Since then, the regulator has been monitoring the response to the clause and has been tweaking it to make it fail-safe.

Despite SEBI’s efforts, corporate governance laws are proving to be quite ineffective; clearly, good corporate governance cannot be forced upon a company.

Improvements in corporate governance have been more voluntary than a case of compliance.

Companies that have ethical and transparent governance mechanisms in place instituted them much before Clause 49.

Globalisation and India becoming the world bestseller have driven many a company on to the corporate governance path. Indian companies are seeking to raise capital from foreign shores.

Be it attracting foreign investors or joint venture partners, good corporate governance is a key factor. Companies exporting goods or setting up operations abroad are becoming increasingly transparent and ethical.

India Inc has been on an M&A (mergers and acquisitions) binge and has realised that getting board and shareholder approval is much easier with a clean corporate governance record.

Yet, corporate governance in the broader context has not percolated through all layers of India Inc. There are a host of reasons for this to happen.

Too many regulators

First, Clause 49 applies only to listed companies. It leaves out the numerous companies that have not gone public.

Then there is the problem of too many regulators. The Ministry of Company Affairs (MCA) looks after all outfits registered under the Companies Act; SEBI is the capital markets regulator; the Insurance Regulatory and Development Authority is the insurance regulator, and the Reserve Bank of India is the banking regulator.

Thus, a bank listed on the stock exchange comes under the scrutiny of the RBI, the MCA and SEBI and it becomes difficult to determine whose scope and responsibility it is to ensure corporate governance.

With lax laws and the absence of pension reforms, shareholder activism has limited significance in India. In the US, funds such as Calpers, with significant holdings in companies, have been instrumental in bringing about governance reforms.

There is an immediate need to tighten the laws and introduce reforms in the pension and insurance sectors.

Lax surveillance, nought penalty

The primary reason for the ineffectivenss of Clause 49 has been the regulator’s lenient approach in surveillance and enforcement of the law.

Under the law all listed companies are required to file a quarterly compliance report with the stock exchanges, which, in turn, are required to file an annual compliance report with SEBI.

This compliance report is a document with objective questions to indicate compliance or non-compliance. Only if a company is non-compliant, does a stock exchange raise questions.

The unscrupulous company may take advantage of this loophole and mark itself compliant. Here lies the catch. The stock exchanges, which have the responsibility for monitoring, do not have the authority to take action against the aberrant companies.

The power to take action lies with SEBI which can penalise companies through fines which can amount to $5.5 million or, worse, delisting.

While the regulator has seldom imposed any fine, it does not favour delisting as that can hurt minority investors by closing their exit window.

The regulator does not have power to impose criminal liability as that lies only with the MCA.

This is why at least 50 0per cent of the listed companies are yet to file compliance details with stock exchanges.

The panacea

To ensure effective governance, SEBI will have to come down on non-compliant companies and impose fines.

Separate governance norms may also need to be introduced for different sectors such as banks, insurance companies and unlisted companies.

Since SEBI has writ only over listed companies, a different regulator may be needed for corporate governance. Else, it will remain a far cry.

(The author is CEO, Nirvana Advisory Group. He can be contacted at vikas@nirvanaconsultants.com)

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