Reforming corporate governance

Sebi should swiftly implement Kotak panel suggestions

Last week, a panel appointed by the market regulator, the Securities and Exchange Board of India (Sebi), submitted a report on how to reform and improve corporate governance in the country. The report of the committee, headed by banker Uday Kotak, in substance addresses its mandate on how to make company boards more effective. The committee has made several valuable suggestions intended to address such issues and protect small shareholders. The major recommendations are splitting the post of chairman and managing director, which will upset many large public and private companies; and asking for an additional shareholder-level approval for special circumstances like a high executive pay, or a director older than 75, or a high royalty payout to a promoter firm, and defining what promoters can be told.

Strengthening the role of independent directors (they should be at least half the strength of the board), greater transparency on subsidiaries and auditors getting more powers, and also being more accountable are suggestions that should improve governance. Knotty questions on information sharing have also been examined. A via media has to be found for promoter-owners to be able to share enough information with the board as is essential for the running of the company, for example. The government could, however, have serious problems with the idea of an independent holding entity structure for public sector enterprises. Such an idea, proposed by the P J Nayak committee for public sector banks in 2014, is yet to be implemented.

It is now up to the market regulator to decide whether or not it accepts these recommendations. However, it is clear that reform is overdue, given the severe problems with respect to corporate governance that have bedevilled India Inc of late, causing a lack of confidence among many observers in the quality of board supervision and auditing. Thus, it would be reasonable for Sebi to move forward on implementing as many of the panel’s recommendations as possible in the shortest possible time.

In the absence of other reliable outlets for Indians’ savings, the amount invested in shares of listed companies has noticeably increased in recent months. As the market is doing well and many new investors have taken the plunge, this is precisely the point when corporate governance will be tested. It will be tempting for those who control companies to bend circumstances to their advantage — for example, parent multinational companies of domestic subsidiaries have frequently been accused of excessive royalty payments for the use of international brand-names. This, critics assert, is simply a way to ensure that earnings from local subsidiaries are sent directly to the parent company. This is unfair on small shareholders in local subsidiaries, who, without such enormous royalty payments, might well have enjoyed higher dividend payouts — or else a greater appreciation in the market value of their stocks. These and other reforms, including the scope and powers of the audit committee, should be implemented. Some of the changes suggested might require legislative changes, but in principle, there is nothing wrong in asking for listed companies to have tighter norms under listing agreement, than required under company law.

Disclosure: Kotak Mahindra and associates are significant shareholders in Business Standard Pvt Ltd.