Investor-friendly provisions in the new Companies Act and changes in the methodology to weigh investor protection drove India's surprise jump in this year's investor protection indicators in Doing Business 2015: Going Beyond Efficiency, a report published by World Bank in October.
This year, India rose 14 places to the seventh rank on the protection-of-minority-investors' list, a silver lining to the gloomy larger picture of the country sliding to the 142nd position on the overall list in terms of doing business.
However, with several rollbacks and postponement of reforms announced, following complaints from companies, India might struggle to maintain its position when World Bank revisits the index next year.
Nadine Abi Chakra, co-author of the report, told Business Standard India's score in terms of protection of minority investors increased due to the Companies Act, 2013, and the introduction of new indicators. "India is, in fact, ranked first on the shareholder governance index. It is 27th in terms of conflict of interest regulation, as a result of the Companies Act, 2013. Overall, India improves from 21st (DB2014 back-calculated) to seventh in the rankings," she said.
This year, the authors of the report changed the name of the 'protecting investors' indicator to 'protecting minority investors' to better reflect the indicator's scope. As a result, three indices were added to gauge protection in matters beyond conflict of interest. And, the existing ease-of-shareholder-suits index was expanded to take into account the allocation of legal expenses.
M P Vijay Kumar, chief financial officer of Sify Technologies and author of several books on company law, said reforms in the Companies Act were key to the jump in rankings. He identified 10 key areas in which the new law had enhanced minority investor protection (See box: Key reforms in Companies Act, 2013). But consultants such as Yogesh Sharma, assurance partner, Grant Thornton India LLP, feel some of the stringent provisions introduced to protect minority investors are "so strict that perhaps, these are harsher than in some of the most advanced capital market jurisdictions".
Such complaints by consultants and corporations led to a rethink in the Ministry of Corporate Affairs. Since June, the ministry has announced at least two rounds of dilution in the definitions and norms governing related-party transactions. Proxy advisory firms had pointed out instances in which some companies that would have required 'majority of minority investors' nod' for a related-party transaction escaped the provision due to relaxation in the Act.
SOME CHANGES IN THE METHODOLOGY THAT WENT INDIA’S WAY:
A new indicator was added to gauge corporate governance beyond related-party transactions. The extent of shareholder governance index encompasses a range of issues and data:
Further, the Securities and Exchange Board of India, which had strengthened its corporate governance norms in April, also revised the regulations and announced changes in September, just a fortnight before it was to be implemented on October 1.
Chakra doesn't rule out the possibility of negative amendments affecting the rating. "In fact, during each cycle, the Doing Business report team takes note of reforms - negative or positive - implemented by economies around the world and assesses their impact on the data." Chakra added, the data came from a questionnaire to corporate and securities lawyers and were based on securities regulations, company laws, civil procedure codes, court rules of evidence and all amendments thereof.
During each cycle, the indicators on protecting minority investors ascertain minority shareholder protection against directors' misuse of corporate assets for personal gain. They also gauge other aspects of corporate law that are unrelated to this transaction but indicative of the protection of minority shareholders.
Sharma of Grant Thornton said the rollbacks might not significantly impact the rankings adversely next year. "It is worth citing, none of these exemptions and relaxations (including proposed ones) will hamper the interest of investors or the public at large, as these cover only private companies and companies with no or very low public interest."
He added, the underpinning idea behind some of the recent amendments, was providing practical relief to companies facing challenges in implementation, the cost of which might have outweighed the benefits.
|KEY REFORMS IN COMPANIES ACT, 2013|
Shriram Subramanian of Ingovern Research Services, a proxy advisory firm focusing on minority investor issues, says, the rollbacks in reforms may not affect the rankings significantly. "Some norms apply, as they have enhanced corporate governance; others have subsequently been diluted or postponed. Still, we have made progress in the positive direction," he said.
According to experts, implementation of these provisions would be important for the ranking. "As far as the ranking goes, I think it will really depend on how effectively the government monitors the compliance with the new law," said Sharma of Grant Thornton.