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Our Bureau

Mumbai , Jan. 16

CORPORATE governance in public sector enterprises in the financial sector could be improved by shifting this responsibility from the administrative Ministries concerned to their (PSEs) boards.

This was suggested by a Working Group on "Conflicts of Interest in the Indian Financial Services Sector" set up by the Reserve Bank of India.

The group, which released its draft report today, said the Government could also think of exercising its ownership rights through specialised agencies (trusts, SPVs, etc), to be created for the specific purpose. Such agencies should create, develop and renew the governing board so as to ensure the qualities of leadership, enterprise, integrity and judgement among its members.

These agencies only should deal with the PSEs as an owner, so as to provide a reasonable hedge between ownership and management, the report said.

It is suggested that the process for professionalisation of directors on the lines of practices being employed in UK, Australia and New Zealand, could be considered.

In the case of private sector, control structures should be so devised as to be consistent with the interest of shareholders who are the owners, especially as control is often exercised through thin holdings and cross holding through a complex pattern of subsidiaries, companies and investment companies, with the added dimension of investments by institutions incorporated abroad. The Group headed by Mr D.M. Satwalekar was set up to identify the sources and nature of potential conflicts of interest in the financial sector in India and possible measures/actions to be taken for mitigating them.

It also suggested that a Conflict Management Policy (CMP) for managing conflicts should be developed by each institution or profession, by which a commensurate premium/discount is placed on the ethical/unethical behaviours of the individuals or the institutions.

The Government has an important role in ensuring that the politico-judicial reforms are calibrated to meet the enhanced needs of an increasingly complex financial sector. Stating that defining financial crime and crafting technology neutral laws are the imperatives in this context, the Group has pointed out that financial services is too crucial an industry in a country's economy to be left solely in the hands of the institutions and the regulators.

In the Group's view an enlightened public, who are aware of their rights and obligations are the best safeguard for ensuring non-exploitation of conflicts of interest by the financial intermediaries.

In the Indian conditions, the Government and the regulators have an important role in enlightening the public of their rights and obligations. The society at large should send a strong message, through all possible means available that pro-consumer behaviour would be rewarded, while anti-consumer behaviour would be appropriately punished.

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