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Tuesday, Mar 16, 2004

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`Cos should adopt corporate governance ratings'

Richa Mishra

New Delhi , March 15

THOUGH efforts are on by regulators, chambers of commerce and rating agencies, it may take a while before the corporate sector buys the concept of corporate governance ratings (CGR).

"The benefits of CGR for the company, regulators and stakeholders need to be advocated," Mr Naresh Takkar, Joint Managing Director and Chief Rating Officer, ICRA Ltd, said.

What is restraining the corporate sector from embracing the CGR is the fear that the regulators may decide to make it mandatory, he told Business Line.

Agreeing with the views of Mr Takkar, a Federation of Indian Chambers of Commerce and Industry (FICCI) official, said: "Companies should be allowed to weigh the pros and cons of the CGR model before adopting it. In fact, we are of the view that corporate governance norms should not be made mandatory. However, it should be recommendatory or voluntary in nature — left to the companies whether they want to adopt it or not."

Another aspect that worries India Inc is the cost of compliance.

"As is it, a company has to deal with so many disclosure norms under the various provisions of the company law. If CGR is made mandatory, it would eat into the profit margins of the corporates," industry sources said.

Setting aside these apprehensions of the corporate sector, Mr Takkar said, "It does not add to the compliance cost, but will improve the cost of capital. Besides, market studies reveal that investors are willing to pay a premium for those companies which have a good corporate governance record."

In fact, companies such as ITC, Wipro, Godrej Consumer Products, PNB Gilts, ESSAP Ltd and Infosys Technologies Ltd have gone ahead with such ratings. Though not all have gone for CGR, some have opted for a rating that evaluates the stakeholders' value creation.

To understand the market mood, ICRA had carried out a survey of 35 leading institutional investors and large brokerage houses during the period October-December 2003.

As per the survey, an overwhelming majority felt that contrary to the apprehensions aired by the corporate sector, the current emphasis on corporate governance is desirable and will play a major role in making the capital markets a safer place for investors.

From the investors' viewpoint, `integrity of accounting statements', and `stress on ethical behaviour' were identified as the key objectives of good corporate governance.

However, the presence of a `strong board of directors', which has been the focus of corporate governance reforms in most countries, featured somewhat lower in the respondent's list of priorities, Mr Takkar pointed out.

Over 85 per cent of respondents felt that corporate governance is as important as quantifiable factors, such as likely growth in earnings, from the point of view of investment decision.

"The facts that well-governed corporate entities are less likely to indulge in malpractice and are more likely to protect the interests of minority shareholders were some of the other contributory reasons cited by the respondents," he said.

The key variable in ICRA's rating methodology for corporate governance includes shareholding structure, governance structure and management process, board structure and process, stakeholders relationship, transparency and disclosure and financial discipline.

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