India inc146;s grim battle against transparency

Typically, market regulator SEBI and the government still face stiff resistance from corporates and promoters on a number of issues, from independent directors and investment companies to whistle-blower policies and disclosure norms.

8216;8216;Sebi has done a terrific job in taking Indian disclosure levels to a very high level. However, more can be done on monitoring and enforcement,8221; says Amit Chandra, Joint MD, DSP Merrill Lynch. Here8217;s a look at the key issues:

WHISTLEBLOWER POLICY: Last year Sebi had proposed that this should be made mandatory. However, after stiff resistance from the industry, it asked the N R Narayana Murthy panel to rework the policy. Later, a whistleblower was made optional for companies.

As the name suggests, the policy was aimed at inspiring employees to come up with information on mismanagement and misuse of funds by officials of a company. The original policy proposed several measures to protect the identity of the whistleblower. But corporates are not enthused. They don8217;t want skeletons to tumble out from their cupboards. Can we expect a stronger policy in 2005?

INDEPENDENT DIRECTORS: Their independence seems to be only on paper. Most of the independent directors are hand-in-glove with the promoters. They rubber-stamp questionable decisions of promoters and ignore fund diversion and mismanagement in their companies. In several top companies, there are people who have remained as independent directors for 20 and 30 years. In Reliance Industries, for example, these directors remained silent when the company made massive investments in other unlisted companies.

A Sebi panel tried to stop this practice and proposed a limit nine years on their tenure. But India Inc 8216;intervened8217; again and lobbied for changes 8212;finally, the limit is now with prospective effect. 8216;8216;A mechanism will need to be evolved for ensuring that such directors are fairly compensated, to ensure that high quality professionals are attracted to such positions,8217;8217; says Chandra.

UNLISTED INVESTMENT COMPANIES: This is the most confusing part of India Inc 8212; and one that companies will protect tooth and nail. Companies and promoters have promoted thousands of unlisted subsidiaries. Many of them divert funds through these companies. The modus operandi: The listed company will give a loan even interest-free to these unlisted companies, which, in turn, will default repayment.

A major chunk of these investment companies hold shares in their listed companies. In fact, promoters have floated several layers of such subsidiaries to hold their stakes in leading group companies. Most of corporate India, from the Tatas, Birlas, and Reliance, follow this practice.

The next amendment of the Companies Act is expected to tackle these investment companies and bring them under proper regulation. Sebi is also getting tough. From April 1, 2005, ownwards, subsidiaries must have one director from the board of the holding company. Besides, the audit committee of the listed company will review the financial statements of its unlisted subsidiaries.

ACCOUNTING GIMMICKS: While there are some gaps in financial statements, corporate sources claim 8220;We are now pretty close to the global best practices.8221; Take that with a pinch of salt. For instance, a study by Crisil earlier this year reclassified and sanitized the annual accounts of 616 manufacturing companies. It restated the accounts of 243 companies 8212; and showed that their actual profits are different from what they reported. Simply put, their books were cooked. Hopefully, India Inc will walk the talk in 2005.