Legislating good behaviour PDF Print E-mail
Friday, 30 March 2018 04:22
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Shobhana edit

As many experts, including Ashwath Damodaran professor of finance at Stern School of Business, New York University, have pointed out, good corporate governance cannot be legislated, it must come from within. In other words, it is not a matter of managements ticking off boxes but rather, aspiring to be clean, transparent and above board in all their dealings, whether with customers, vendors or shareholders. Unfortunately, very few companies in India believe in good corporate governance; it might appear promoters are complying with the rules, but they spend more time looking for loopholes in the law that they can exploit. What’s even more unfortunate is that directors, even independent ones, have, more often than not, played along with the promoters. Indeed, even bankers who should have been the watchdogs on boards, since it was their money at risk, have been reluctant to flag concerns openly, probably because most businessmen are known to have strong political connections. Also, institutional shareholders have rarely come out on any wrong practices they may have spotted, preferring instead to vote with their feet. Moreover, in the absence of strong legislation and protection, there has been very little whistle-blowing. All in all, corporate governance has been observed more in the breach, with companies disclosing as little as they can get away with. It’s difficult to believe, therefore, that the mindset in corporate India will change meaningfully in the near future even after the new rules come into force.

However, there is no doubt the Securities and Exchange Board of India (Sebi) has done a good job of accepting the bulk of the Kotak Committee’s 80 recommendations, and that this will compel companies to become more transparent. Among the new rules, the ones relating to more disclosures of related-party transactions are important; too many such transactions are being pushed through without adequate disclosures. Also, from now on, if a royalty payment to a related party exceeds 2% of the consolidated revenues, it needs to be approved by a majority of small shareholders. Equally important, Sebi has decided that the audit, nomination, remuneration and risk committees must play a bigger role. The capital market regulator also wants that independent directors be more qualified; this is a way to stop promoters from appointing their friends and relatives as independent directors.

Sebi also wants that ‘experience and expertise’ be made public, again trying to prevent cronies of promoters being appointed to boards, irrespective of their ability to contribute to the performance of the company. There has been some concern that making the rules too onerous could keep even good professionals away from boards; it would be a pity if that happened since there are very few top-class professionals in India and even fewer women. Sebi would do well to continuously seek feedback from these professionals because these are people who can make a difference to the quality of deliberations and decisions in Indian boardrooms.


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