Compliance deficit

| Updated on March 18, 2021

The rule book on corporate governance is getting fatter but the compliance is not getting any better

With the Securities Exchange Board of India (SEBI) and the Ministry of Corporate Affairs vying with each other to write newer corporate governance regulations for India Inc, the rulebook for the top listed companies is getting quite voluminous indeed. While writing new rules into the statute, regulators seldom stop to evaluate if companies are in compliance with existing ones. This is what makes the Excellence Enablers Survey on Corporate Governance, piloted by former SEBI Chairman M Damodaran, such a useful document. This comprehensive survey, which dives deep into the annual reports of the Nifty 50 companies, measures the degree of compliance achieved by these companies with governance provisions in the Companies Act, 2013 and SEBI’s 2015 LODR Regulations. It also evaluates whether these companies are embracing the spirit of the law. Importantly, what it finds is a patchy record of compliance in letter and in spirit, even in this elite sample.

To prevent promoters and professional managers from exercising undue influence on corporate decisions, the Companies Act and LODR specify minimum board strengths, quotas for non-executive/independent directors (IDs) and minimum meeting requirements. The survey shows that companies find it easy to meet such numerical requirements. About 42 of the 50 companies had over nine-member boards when only six are required. Against a 50 per cent quota for non-executive directors, most Nifty firms featured over 75 per cent. Against the Company Law rule of one-third IDs (the LODR requires 50 per cent in some cases), over 39 companies filled over half their boards with IDs. But it is when one drills down to more qualitative aspects that many gaps emerge. For instance, separate meetings of IDs are critical to their autonomy, but 17 Nifty companies flouted rules to hold no such meetings; 33 held only one. Attendance records of Nomination and Remuneration Committee and Audit Committee members were far from spotless, with many skipping meetings. Some directors even had nil attendance but inexplicably held on to their board seats. Boards also seemed to take their risk management functions rather lightly, with 22 FY20 annual reports not even flagging Covid as a risk. Companies seem loath to put official whistle-blower mechanisms in place and were casual about AGMs, preferring to hold them many months after the accounts, with IDs skipping them.

This compliance record at India’s leading companies causes one to despair about the state of governance at the other 5,000-odd listed companies that face far less public and analyst scrutiny. Before framing their next set of governance rules, SEBI and the Corporate Affairs Ministry must investigate reasons for the current non-compliance and identify if it is owing to real hurdles or wilful default. Governance rules also need to be harmonised across the Companies Act and LODR, so that companies don’t find it easy to exploit loopholes.

Published on March 18, 2021

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