French investment firm CLSA has said that the Indian market regulator Securities and Exchange Board of India (Sebi) has failed to clear some major roadblocks in Indian corporate governance.
In a recent report titled “Tremors and Cracks” published in collaboration with the Asian Corporate Governance Association (ACGA), CLSA points out that the regulator has not taken steps to improve the quality of financial disclosures. None of the Indian companies figured in the list of Top 15 companies in the Asia-Pacific region in terms of corporate governance score. Taiwanese technology firm TSMC topped the list, followed by Australian firms Newcrest and Brambles. Even some Thai and Malaysian firms beat Indian firms to the list.
At 17, Infosys was the highest ranked Indian firm in terms of corporate governance score. HUL at number 28 and Wipro at number 35 are the only other Indian large caps in the longer list of 40 large caps (firms with a market cap of $10 billion or more).
|LOW ON THE ETHICS LIST
Top-40 CG ranking of large caps in Asia Pacific (> $10 bn market cap)
|6||Public Bank||Malaysia||Financial services|
|7||HSBC||Hong Kong||Financial services|
|8||StanChart||Hong Kong||Financial services|
|Source: CLSA Asia Pacific markets|
“Despite efforts made by the corporate sector and individual regulators to raise corporate governance standards, these mostly fail to address core governance issues such as accounting standards, the regulation of auditors and obstacles to voting for investors who are unable to attend company meetings,” Sharmila Gopinath, research director, ACGA, said in the report.
The report said that corporate governance in India has moved forward a couple of steps since a similar survey conducted in 2010, with the overall score up from 49 per cent to 51 per cent, but the ranking staying at seventh place. “This is not due to a lack of awareness by the regulators, but rather a piecemeal approach to reform and a lame duck government unable to do anything meaningful given infighting among its allies,” the report said.
While the report acknowledges Sebi’s moves in areas such as release of audited financial results within a period of 60 days and introduction of e-voting, etc, it says work needs to be done in improvement of formats of disclosure.
“One relates to the format of quarterly reports, which lack cashflow statements and balance sheets, and could be improved in other ways (eg, more detail on revenue). At present, balance sheets are only provided every six months and even then come in a condensed form with no notes to accounts (in the half-year report), while cashflow statements are still missing from interim reports.”
According to the report, few companies provided adequate P&L, cashflow and balance sheet disclosure on a quarterly basis - some large-cap companies provided incremental details such as balance sheet and consolidated results every quarter, but most did not.
Attacking the Indian regulatory regime, the report said, “It is only if the company is listed abroad do the quarterly reports improve – and then depending on where the company is listed.”
Lack of a strong framework for related party transactions were another area of concern pointed out by the ACGA. The rules governing related party transactions “require only board approval, offer a limited role to audit committees and mandate disclosure only in quarterly compliance reports and annual reports.”
CLSA-ACGA said it had earlier recommended that SEBI incorporate stronger checks into the listing rules, but instead the regulator recommended an amendment to the company law to the Ministry of Corporate Affairs (MCA) in February 2011. “While the content of the proposal was sound – that interested shareholders should not be allowed to vote on special resolutions approving related-party transactions - putting it in the company law guaranteed an inefficient outcome. Not only does the company law cover all types of incorporated firms (listed and unlisted), but amending this law has been tortuously difficult in India,” the report noted.
India also lags more advanced markets in Asia in its failure to undertake a comprehensive review of its code of corporate governance (or Clause 49 of the Listing Agreement), last comprehensively revised in 2004.