Corporate misgovernance in India

NSE has blotted its record even with separate chairman and managing director roles

The regulatory time deadline set by the Securities and Exchange Board of India (Sebi) by when listed companies needed to appoint two unrelated persons to the positions of chairperson and managing director (MD) was April 1, 2022. Indian print media has reported that about 150 large-cap companies such as Reliance Industries, Adani Ports and Bajaj Finserv would have needed to split the positions of chairman and MD to comply with this regulatory requirement. Conveniently for companies with the same person serving as chairman and MD, on February 15, 2022, Sebi dropped this requirement for listed companies to have two unrelated persons as chairperson and MD and made it voluntary. This article examines the implications of this regulatory surrender and the absurd goings-on in the National Stock Exchange (NSE) between 2013 and 2017.

The William Cadbury Committee on the “Financial aspects of corporate governance” was set up in 1991 by the London Stock Exchange, accounting professionals and others. Two principal recommendations of the Cadbury Committee, which submitted its report in 1992, were to separate the roles of the chairperson and MD and to set up empowered audit committees. Indian corporate governance committees have made similar recommendations. For example, the Kotak Committee on page 20 of its report submitted to Sebi in October 2017 recommended separation of the positions of chairperson and MD of listed companies, provided their public share-holding was at least 40 per cent. (The full report is at https://www.sebi.gov.in /reports/reports/oct-2017/ report-of-the-committee-on-corporate-governance _36177.html.)

Ideally, second generation majority owners of companies should allow professional managers to take up the roles of chairpersons and MDs. That does not happen often for various reasons, including when the owners are relatively young and prefer to manage their own companies. However, if majority owners hold the positions of both chairperson and MD in listed companies, the interests of retail shareholders could be given short shrift or completely ignored. Suffice it to say that this Sebi ruling of leaving it to listed companies to decide on splitting the positions of chairperson and MD is a retrograde step from the point of view of corporate governance.

Now to turn to the pathetic real-life drama surrounding the performance of the MD and the board of a deservedly acclaimed company called the National Stock Exchange (NSE). Ms Chitra Ramkrishna (CR) took over as MD of NSE in April 2013 and Anand Subramanian (AS) was appointed thereafter as “chief strategic officer” — whatever that means. It is surprising that the NSE board acquiesced in this dubious appointment of a person who did not have the relevant qualifications. Over the next few years there were several enhancements in AS’s remuneration, finally ending up at around Rs 4 crore per annum. According to media reports, these increases in AS’s salary were at the behest of the MD. However, the extraordinary salary hikes had to be known to board members. Even if no formal approval was granted by the board, rumours would have been rampant within the NSE about repeated raises in AS’s emoluments at CR’s initiative. In fact, several anonymous complaints about AS and CR were sent by NSE staff to Sebi. Perhaps the feeling at the NSE’s working levels was that no useful purpose was served by petitioning NSE board members since they were complicit.

The NSE was set up in the wake of the wrongdoings of several chairpersons/senior managers of major public and private sector financial sector institutions during the Harshad Mehta 1992 scam episode. Given this background, it is more than surprising that the NSE board took three years from 2013-2016, after AS’s appointment in 2013, to presumably indicate to CR that she would be dismissed, and she chose to pre-emptively resign on November 29, 2016. It is extremely strange that NSE board members and its senior management did not feel the need for NSE to make public a comprehensive internal investigation in the five years from when CR resigned in 2016 till the end of 2021.  A likely explanation could be that the NSE board and management felt that sweeping the CR related dirt under the carpet would make the NSE’s public listing process smoother.

Illustration: Binay Sinha

It may be recalled that the then chairperson of NSE was quoted in The Economic Times of July 6, 2016, as saying that a “credible road map had been put in place for listing NSE.” It was also reported that by January 2017, NSE expected to file papers for an initial public offering with Sebi. The New York Stock Exchange went public in March 2006 and other exchanges located in developed country jurisdictions have been listed for some time. It would thus be a reasonable assumption that the need to avoid any negative news about NSE, relating to CR and AS, prior to its envisaged listing took precedence over all other considerations at NSE.

Stock exchanges are market infrastructure institutions (MIIs) and have surveillance departments which work at an arms’ length from the management and board members. Such surveillance departments are expected to keep a watch on any suspicious activities. In this context, the Bimal Jalan Committee on the “Review of Ownership and Governance of MIIs” had stated in its November 2010 report to Sebi that it was “not in favour of the listing of MIIs.” It appears that private sector investors in NSE are keen for this stock exchange to be listed since listing would make it easier for them to exit. However, that should not be a determining factor for NSE to be listed since it was set up to provide competition to and not copy the Bombay Stock Exchange. All things considered, the cause of improving corporate governance in Indian stock exchanges and more widely in Indian financial markets would be better served if NSE were to continue as an unlisted company with management salaries that are comparable with those of public sector financial institutions.  

j.bhagwati@gmail.com. The writer is a former Indian Ambassador, World Bank Treasury finance specialist and currently Distinguished Fellow at Centre for Social and Economic Progress