Half-way house

The last couple of years have seen quite a lot of dirty linen being washed in public about the flexible corporate governance standards at India Inc. It is therefore quite surprising that there wasn’t a more comprehensive public debate around the recommendations of the Uday Kotak Committee on corporate governance, which submitted its report last October. The Securities and Exchange Board of India (SEBI) has now decided to implement the report on a piecemeal basis, accepting about 40 of the 80 recommendations, modifying others and jettisoning 18 proposals.

The recommendations accepted by SEBI, if passed into law, can make a material difference to public shareholders in critical areas of governance. But their efficacy will be tested in practise. The mandatory separation of the positions of Chairperson of the Board and CEO in listed companies, for instance, is a significant move to reduce concentration of powers and root out conflicted decisions such as over-the-top managerial pay. But then, whether the Chairperson truly reins in top managers would depend on who appoints him/her and whether he/she is free of promoter influence. Cosy related party deals have been the bane of India Inc. Therefore, requiring companies to seek shareholder approvals in all material deals with specific approvals for royalty payments of over 2 per cent of sales, is welcome. But whether shareholders really manage to vote out transactions that are inimical to their interests, will depend on ownership patterns and their ability to rally institutional support in crucial meetings. Having said this, the new disclosure requirements on auditor resignations, related party deals and consolidated quarterly results will certainly improve the flow of material information to public investors. Some of SEBI’s decisions to water down the committee’s proposals are, however, contentious. It isn’t clear, for instance, why the Chairperson-CEO separation, quorum for Board meetings or deadlines for holding AGMs must apply only to the top 100, 500 or 1000 listed companies by market value. The intent may be to reduce the compliance burden on smaller firms. But then, in the Indian context, retail portfolios are dominated by mid- and small-cap firms. It is also smaller sized firms that feature low levels of analyst scrutiny and thus are at greater risk of mis-governance.

SEBI has also remained silent on some of the critical recommendations which would have expanded its own regulatory ambit — powers to prosecute auditors and scrutinise qualified accounts. Perhaps these are some areas where SEBI has lobbed the ball to ‘other agencies’ for review. Given the seriousness of the issue, it would have been useful if SEBI has elaborated on its reasons for cherry-picking proposals. But overall, Indian investors may be more keen to see prompt enforcement actions on governance that bring the many perpetrators of recent scams to book.

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