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Governance spirit

Boards and shareholders should express themselves

Business Standard Editorial Comment  |  New Delhi 

The market regulator's latest diktat to is another example of how some Indian companies have made a mockery of corporate Referring to a listed company that allocated 15 minutes for conducting annual general meetings, the Securities and Exchange Board of India (Sebi) shot off a letter to last week saying they must ensure that corporate principles in the are followed in "letter and spirit". A series of reports in this newspaper last week also pointed out how good practices are still low down on the priority list of many of India Inc's leading lights. The list is long, the latest being Cairn India's $1.25-billion loan to its parent on generous terms. Even before the loan was disclosed at a post-earnings conference call, Cairn had already transferred $800 million. Under the terms of the new Clause 49, which will be effective from October 1, this would count as a violation, because listed companies are required to seek shareholder approval for related-party transactions. Cairn has clearly and knowingly violated the spirit of the law.

The good news, however, is that shareholders, especially institutional ones, have started expressing themselves. For example, was forced to alter the terms of its investment in a new plant in Gujarat after some mutual funds objected to parts of the deal. Tata Motors' shareholders also voted against remuneration for three of its top executives on grounds that the company was making losses. is coming under increasing pressure following the revelation of such violations - partly because of the activism of proxy advisory firms, which seem to be filling a regulatory void. Neither nor the ministry of corporate affairs has shown adequate urgency in this regard for years. It is only now that they have woken up to strict enforcement. The new Companies Act, for example, prescribes a code of professional conduct for independent directors and imposes stringent responsibility and accountability for their conduct. There is also a provision for performance evaluation of board members - and as recent examples show, electronic voting has helped greater shareholder participation in important company meetings and resolutions.

But it's equally true that there is a limit to how much good can be legislated, especially in a scenario where institutional investors, including foreign institutional investors, on average own just about a third of the shareholding in companies. This is not so in developed markets, where listed companies are truly public, with institutions holding a majority of the shares. For example, institutions' stake in the Dow Jones' 30 companies is 90.9 per cent, giving them virtual control over these companies. But still, many of the problems can be solved if board members ask a simple question to the top management: why are you doing what you are doing? India Inc, now faced with a major governance challenge, should recognise that such scrutiny and pressure would only increase over time. And in the future, only those companies that beef up their governance structure and wake up to the investors' and regulators' expectations of them will stand out.

First Published: Wed, August 06 2014. 21:38 IST