In his 1999-2000 Budget speech, Yashwant Sinha spoke of good corporate governance. “It is increasingly being realised that if investors have to be drawn back to the capital market, companies have to put their houses in order by following internationally accepted practices of good governance,” the Finance Minister said, and proposed a national award for excellence in good corporate governance. It was a prize the government gave out only once — to Infosys, then a favourite of global and domestic investors. The stock market manipulation of 2000-01, and collapse of the country’s top mutual fund, UTI, likely nudged the government to quietly abandon the award thereafter.
Earlier this month, a committee headed by banker Uday Kotak submitted its report on corporate governance, the fourth major Indian report of its kind in the last two decades. The report comes at a time when governance at many top listed firms, including some storied ones, has been called into question; however, unlike 17 years ago, the government or the regulator need not worry about attracting investors to the capital market — local investors have been pouring money into equities even as foreign funds have been selling.
Among the panel’s recommendations: separating the roles of non-executive chairperson and managing director/CEO to help the board act independently, create a more egalitarian board environment, and make it more conducive to debates; strengthening the role of independent directors; greater disclosure of related party transactions; power to act against auditors; and sharing of information with controlling promoters or shareholders.
The panel recognises that a large number of listed Indian firms are controlled by a single promoter or a set of persons acting in concert where lines of control, influence and information do not necessarily stay within formal corporate structures. It is this reality that is reflected in the current joke that the two qualities most needed to be on the board of an Indian firm are to be a friend of the promoter’s, and the ability to keep one’s mouth shut.
The report recommends that from April 1, 2019, at least half the board of directors of India’s top 500 listed firms must comprise independent directors. Flaws in board structures have been in evidence whenever gatekeepers have failed to do their job. In its report on Kingfisher, the Serious Fraud Investigation Office (SFIO) made scathing remarks on the board of directors, which included a former chief of the Securities and Exchange Board of India and a former Finance Secretary. The independent directors who were part of the audit committee did not question Kingfisher’s accounting policy and changes in methodology, and were unaware of their impact on profitability and financials, the SFIO said. “Some of the independent directors were masquerading as independent directors but were not really independent,” it said. The failed software service firm Satyam, too, had a heavyweight board, but no member seemed to have questioned the promoter on the level of cash and the dodgy accounting.
In some of India’s widely held public listed firms, run by professionals with no controlling set of shareholders in sight, there is no succession planning, and the top deck earns compensation packages grossly disproportionate to that of average employees’. That raises questions about the quality of the mandatory annual board scrutiny of CEOs, based on key performance metrics. In a severe indictment of the boards of a couple of private banks, a massive divergence was found in the size of bad loans recognised by the banks and the RBI; two banks where the regulator flagged such divergences had a common auditor.
It can be argued that the challenge of bad loans would have been far less severe had auditors fulfilled their fiduciary role better. The Kotak committee sees a case for creating deterrence to ensure this, and recommends greater powers for accounting watchdog Institute of Chartered Accountants of India. ICAI has been unenthusiastic, saying this was outside the committee’s scope — however, a committee on corporate governance headed by Naresh Chandra, too, had, over a decade ago, stressed on the quality of audits, and recommended independent quality review boards.
The question is, can the overall standards of corporate governance be seen separately from prevailing standards of governance in society? In a way, it is the absence of ethical conduct that puts the entire burden of enforcing such standards on the regulator. In many countries, the drive has been led by activist shareholders; in India, the most powerful institutional shareholder — the government-owned LIC, which invests over Rs 50,000 crore on average in Indian firms annually — rarely rocks the boat.
Though unconnected, the Kotak review of corporate governance comes soon after a paper by the French economist Thomas Piketty and his colleague Lucas Chancel noted that the top 1% of income earners in India now control close to 22% of the total income. This disparity is mirrored in the dividend income of this creamy layer of corporate India. After the government started taxing dividend income in excess of Rs 10 lakh besides the dividend distribution tax that was already in vogue, this elite found a way out in a flurry of buybacks. N R Narayana Murthy has repeatedly hit out against the ugly, iniquitous side of Indian capitalism — and indeed, drawing a lakshman rekha for acceptable behaviour is not beyond the competence of the legislature.