`Professionalising' Corporate India

S. Vaidya Nathan

THE Securities and Exchange Board of India (SEBI) has decided to incorporate the corporate governance norms as part of the requirements for listing.

The implementation of the corporate governance norms (as laid by the Kumar Mangalam Committee) on a mandatory basis may only serve the purpose of making promoters/management aware of a concept.

SEBI has taken the right step by putting compliance with corporate governance in the book. It has also required companies to report, on a quarterly basis, the compliance with corporate governance. Stock exchanges have to set up a cell to monitor the compliance.

The rote way: This particular SEBI edict is set to go the way of the auditor and MAOCARO reports that form part of an annual report now. Few investors of consequence, if any, look at the auditor's report because the quality and track record of the audit has been poor and it is dated and more tuned to the letter than the spirit of the law.

If this is the state of affairs with regard to a report of external agency (in whose appointment, the promoters play a vital role), the corporate governance report may also head the same way. And it would be in the hands of the promoters and management themselves. At best, it may provide some incremental information whose value in terms of timeliness would be limited.

Way of managing: Corporate governance is not so much about reports in the annual report and having a number of independent directors on board. There have been numerous instances of companies with a sizeable number of independent directors going about systematically destroying shareholder wealth.

VLS Finance, at the time of the IPO priced at Rs 400 per share, had a board which read like a who's who of the financial world. What has happened subsequently is well known. The core of corporate governance is about the value systems that the promoters bring to bear on the company.

Since barring a handful of companies which are professionally managed, the rest are all run by the promoters and professional managers together, the former have the final word. So it is crucial that promoters bring a set of values that focus on using public money in the best way by maximising the interests of all stakeholders.

Of course, there is nothing like a perfect company on this score though on a relative ranking, Infosys Technologies would come close to the top and comfortably ahead of the rest. The number of companies that score high is a small universe and by extension it has also restricted the quality universe of investment-worthy stocks.

The SEBI move is unlikely to do anything to change that. What is required for promoters of more companies to change their ways, take a leaf or two out of the Infosys/HDFC book and run the show with a high degree of transparency and an eye on maximising value of shareholders.

And since Corporate India is littered with business groups with more than one listed entity, this manner of running the show has to be embraced across the whole group. Even some of the biggest names in corporate India who adopted the corporate governance mantra a few years ago have tended to have different standards for different companies in their fold.

The reality check: If SEBI had done a reality check, it may have found that far more important aspects could have brought into the fold of corporate compliance than corporate governance. The flow of information about material events has improved since SEBI introduced that requirement two years ago.

But that is confined to just reporting an event. Timeliness, breadth and quality of information have been major casualties. Unfortunately, SEBI does not appear to have looked closely at the kind of information being put up by the corporate sector with a few exceptions of course.

Information about mergers, de-mergers, takeovers, buybacks, asset sales, the impact of global level developments and the like is so sketchy that it would be of no use to shareholders and would be investors. Quite clearly, though Corporate India is complying with delays in many cases to the material events reporting requirement, it is not doing so in a wholehearted manner and in the spirit of the requirement.

These corporate actions are areas where an objective list of disclosure requirements can be put in place and monitored effectively. The subjective element in terms of the kind of values the promoters bring to the table would have been minimised. Such a step would have served a better purpose than the corporate governance requirement.

Good lead and speedy delivery: In fact, SEBI could have taken its own lead in mandating the quarterly disclosure of the promoters' shareholding. This has become price-sensitive information in a way that has not been the case in the past due to takeovers, mergers, de-mergers, buyback and creeping acquisitions. Now more authentic contemporary information on this aspect. The same line has to be pursued for major corporate actions.

Even as it moves on improving disclosure breadth and quality, there are two vital gaps that need to be filled. One is for SEBI to have an EDGAR (electronic filing system)-like system used by the Securities and Exchange Commission, US. Two, is to allow complete access to all filings by issuers of securities to private entities that could use them in a meaningful way. This would help SEBI's own efforts at implementing regulations.

It would also enable it to focus more on the crucial areas such as enforcement where only it has powers to make a difference. Putting in place corporate governance as part of the listing requirement may be more fashionable and in tune with the times, but on disclosures, SEBI has to get to brass tacks for corporate actions as it did in the case of IPOs/rights offers of securities.