As India Intensifies its Struggle against Corruption in The Political Sphere, Virat Bahri wonders why The Debate on Transparency can’t be Extended to India inc. as well, and how B&E Power 100 Companies can play a key role
India’s own corporate governance legislation in the form of Clause 49 was developed in 1999 itself, as per the proposals of the Kumarmangalam Birla Committee under SEBI. A lot of the requirements were quite similar to SOX, which came later, and Clause 49 has been hailed even beyond Indian borders. Around 84% of the companies surveyed in a Grant Thornton-FICCI study have admitted that investor perception has improved for companies implementing greater transparency into their systems as per the ruling. But implementation of laws is where statistics really get damning. Another KPMG survey had 71% of respondents saying that penalty levels to discipline poor and unethical governance are low, 53% believe that even the new proposed Companies Bill will have insignificant impact and 35% cite weak regulatory oversight in India as the culprit. On that point, the cover story of our sister publication Banking Finance & Markets for May 2011 revealed some shocking findings. Out of the 8,47,615 companies registered with the Registrar of Companies (RoC) as on March 2010, only 53.8% filed their returns last year. These companies find it perfectly acceptable to do so, since they can easily escape prosecution with a petty fee (or a pettier bribe). Prosecution is hardly visible for 20 companies blacklisted by the SEBI between 2006 and 2010. Moreover, some 50000 cases of corporate fraud are pending in Indian courts and conviction rate is just 5%. In US, 1236 convictions were secured post Enron in just five years. Larger companies could be even harder to prosecute because of the power they wield. South Korea witnessed this some time back when Chung Mong-Koo, Chairman, Hyundai Motors got away with Presidential pardon for a fraud conviction due to his immense worth for South Korea. Hyundai posted a sales turnover of KRW 36.77 trillion in 2010, a significant 3.13% of South Korean GDP at current prices of around KRW1,172.8 trillion for that year (The Bank of Korea).
Moreover, India still has a long way to go in terms of investor protection. Shareholder voting procedures are notoriously inefficient (they still often do a show of hands in India rather than actual counting!) and fail to fulfil their purpose of active, informed and widespread shareholder involvement even on issues like approving large transactions. This becomes even harder as most listed companies are promoter/family owned in India. That is why even warrants are normally issued to controlling shareholders. Satyam attempted a major investment of around $1.6 billion in Maytas, which was blocked by shareholders, and that started the entire scrutiny into its accounts. A white paper by the Asian Corporate Governance Association (ACGA), Hong Kong, points out that the overt reliance on mechanisms like “independent directors (appointed by controlling shareholders), independent board committees and greater corporate disclosure as the primary mechanisms to check abuses of power by promoters and to safeguard the interests of minority shareholders is likely to prove weak and insufficient (as in the Satyam case)”. The report, besides highlighting issues like provision of timely, standardised and quality information to shareholders including financial reports, publishing results of voting, et al (a number of B&E Power 100 companies have scope for improvement on these fronts); also cites serious flaws in the auditing profession in India. The greatest anomaly is that the Institute of Chartered Accountants of India acts as a self regulator, whereas there are independent regulatory bodies in other countries.
This year, the B&E Power 100 list is led by Reliance Industries, which wrested the top spot from ONGC this year. But it’s quite a coincidence that RIL faces issues of transparency at the moment, with respect to the CAG accusing the government of wrongly allowing the company to hike its capital expenditure in the D-6 basin. Interestingly, three more Power 100 companies – Wipro, SBI and Sesa Goa face scrutiny over their accounting practices. RBI found some irregularities in loans extended by SBI to telecom companies. Wipro has been asked by the US SEC to prove that its auditor KPMG is indeed independent as per continuing investigation of the embezzlement case. Sesa Goa has come under investigation for alleged over-invoicing of its imports. Even Infosys faces a lawsuit in Alabama, since whistleblower and former employee Jack Palmer has accused the company of sending Indian workers to US on B-1 visas when H-1Bs faced restrictions.
One cannot deny that a number of the B&E Power 100 companies have taken valuable steps towards developing corporate governance standards, and it would be unfair to apply the ‘guilty till proven innocent’ yardstick for every case that comes up. But it is critically important that they maintain them, push the envelope towards best practices and even lead the way. Corporate governance isn’t expected to get much better in India without strict convictions, but these companies can definitely lead by example and become the benchmarks for India Inc. in that sense. If these ‘Power’ players disappoint their stakeholders even one bit, it can send years of enterprise down the drain, and hamper India’s growth trajectories for years to come ahead.
Moreover, India still has a long way to go in terms of investor protection. Shareholder voting procedures are notoriously inefficient (they still often do a show of hands in India rather than actual counting!) and fail to fulfil their purpose of active, informed and widespread shareholder involvement even on issues like approving large transactions. This becomes even harder as most listed companies are promoter/family owned in India. That is why even warrants are normally issued to controlling shareholders. Satyam attempted a major investment of around $1.6 billion in Maytas, which was blocked by shareholders, and that started the entire scrutiny into its accounts. A white paper by the Asian Corporate Governance Association (ACGA), Hong Kong, points out that the overt reliance on mechanisms like “independent directors (appointed by controlling shareholders), independent board committees and greater corporate disclosure as the primary mechanisms to check abuses of power by promoters and to safeguard the interests of minority shareholders is likely to prove weak and insufficient (as in the Satyam case)”. The report, besides highlighting issues like provision of timely, standardised and quality information to shareholders including financial reports, publishing results of voting, et al (a number of B&E Power 100 companies have scope for improvement on these fronts); also cites serious flaws in the auditing profession in India. The greatest anomaly is that the Institute of Chartered Accountants of India acts as a self regulator, whereas there are independent regulatory bodies in other countries.
This year, the B&E Power 100 list is led by Reliance Industries, which wrested the top spot from ONGC this year. But it’s quite a coincidence that RIL faces issues of transparency at the moment, with respect to the CAG accusing the government of wrongly allowing the company to hike its capital expenditure in the D-6 basin. Interestingly, three more Power 100 companies – Wipro, SBI and Sesa Goa face scrutiny over their accounting practices. RBI found some irregularities in loans extended by SBI to telecom companies. Wipro has been asked by the US SEC to prove that its auditor KPMG is indeed independent as per continuing investigation of the embezzlement case. Sesa Goa has come under investigation for alleged over-invoicing of its imports. Even Infosys faces a lawsuit in Alabama, since whistleblower and former employee Jack Palmer has accused the company of sending Indian workers to US on B-1 visas when H-1Bs faced restrictions.
One cannot deny that a number of the B&E Power 100 companies have taken valuable steps towards developing corporate governance standards, and it would be unfair to apply the ‘guilty till proven innocent’ yardstick for every case that comes up. But it is critically important that they maintain them, push the envelope towards best practices and even lead the way. Corporate governance isn’t expected to get much better in India without strict convictions, but these companies can definitely lead by example and become the benchmarks for India Inc. in that sense. If these ‘Power’ players disappoint their stakeholders even one bit, it can send years of enterprise down the drain, and hamper India’s growth trajectories for years to come ahead.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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IIPM: Indian Institute of Planning and Management
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting
IIPM Prof. Arindam Chaudhuri on Internet Hooliganism
Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
