Out of 29 initial public offerings (IPOs) graded since May 2007,corporate governance structures were found to be weak in close to 50 per cent of the companies evaluated,rating agency Crisil has said. Only about 10 per cent of these 29 companies were assessed to have robust corporate governance structures,while 25 per cent were average and 15 per cent were above average.
Specifically,quality of board and their independence and propensity for related party transactions emerged as key differentiators between well-governed and weakly governed IPO graded companies, Crisil said.
Crisil observed that in contrast to well-governed companies,weakly governed IPO graded firms displayed limited independence of the board from promoters,limited understanding of the independent directors about the business of the firm,and a higher propensity for related-party transactions. In over 45 per cent companies with relatively weak governance scores,independent directors exhibited less than expected awareness about the companys businesses or other businesses of the promoter group,or even IPO related plans and strategies of the company.
Moreover,in 15 per cent of the cases,the quality of independence of the board from promoters/ management was itself an area of concern,as it could impact the extent of balance and quality of oversight that independent directors are expected to bring to bear on board decisions.
In about 55 per cent of the companies assessed to have governance issues,related party transactions or presence of group companies in similar lines of business emerged as key issues,as these could potentially affect minority shareholder interests.
The IPO grading methodology includes a broad assessment of corporate governance and management quality,apart from other key factors.
Initial public offerings graded since May 2007
10 per cent
Assessed to have robust corporate governance structures
15 per cent
Firms where quality of board independence from promoters is a matter of concern
45 per cent
Firms with weak scores where directors exhibited less than expected awareness about companys business