India Inc's boardrooms have failed spectacularly at corporate governance

Whenever a corporation in India rises meteorically, the instinct is to wait before exhaling. Mostly, these corporations survive and thrive, riding on the sparkling new opportunities of economic reform. But too often, India’s unleashed entrepreneurial spirits leap far ahead of sober corporate governance practices, resulting in headline-making controversies.

 

Two things define this trend. First, it gathered momentum around the second decade of this century, the go-go years for private enterprise. Second, it partly reflects the sub-optimal functioning of government and regulatory oversight and/or the outright failure of auditors and corporate boards. This was the pattern set by Satyam Computer Services, Sahara, Ranbaxy, Kingfisher Airlines, Nirav Modi, Infrastructure Leasing and Finance (IL&FS), Byju’s, Yes Bank, and the National Stock Exchange.  

 

The latest in the line is nine-year-old Paytm Payments Banks Ltd, which had its licence cancelled by the Reserve Bank of India (RBI) late last month. The Paytm brand is the undisputed standard bearer of the mobile wallet. Just a decade ago, Paytm, promoted by Vijay Shekhar Sharma under the One97 Communication umbrella, shot to national attention when it hyped the virtues of its Paytm wallet in full-page advertisements the morning after the nation was stupefied by the announcement that the government would withdraw 86 per cent of the value of currency in circulation.

 

Mr Sharma’s lightning instincts in getting those ads out on the same night the Prime Minister announced demonetisation — and just hours before newspapers were put to bed — established his entrepreneurial creds. He rode high not just in the traumatic months that followed but till at least 2022, after which mobile wallet interoperability allowed competitors such as PhonePe, Google Pay and others to gain critical mass. Though PhonePe and GPay soon outstripped Paytm on the Unified Payments Interface platform, Paytm remains the verb Indians used for instant online payment rather like “xerox” or “fridge” or “google”.

 

The payments bank was set up as a sort of backward integration, building on the mobile wallet base. Yet just five years later in 2022, the RBI barred the company from on-boarding customer, citing weak risk management protocols, including in Know Your Customer verifications. The fact that the parent company failed to get its act together in almost four years thereafter is notable — though this is a victim-less controversy since customers were migrated to other institutions. But given the accolades that were showered on the promoter between 2016 and 2022 from media houses and the state, these compliance shortcomings are noteworthy.

 

Crash-landings such as the one by Kingfisher Airlines could be ascribed to ill-judged government policy. The airline borrowed heavily from state-owned banks after the government included airlines within the definition of low interest infrastructure loans. Siddharth Mallya, who was gifted the airline to run by his now fugitive debt-ridden father, dismissed the failure as the kind of business error that happens all the time. But you have to wonder at the airline’s board  — stuffed with lawyers, bankers, former airline chiefs plus Vijay Mallya’s close aides — endorsing a strategy offering business class services at economy class fares.

 

Questions of board responsibility could be asked of IL&FS which, Enron-style, was loading debt on to myriad subsidiaries to conceal losses and leveraging short-term debt to finance long-term projects. When the scale of defaults came to light in late 2018, the government moved quickly to supersede the board and appoint new members to revive the company. Light-touch regulation for “shadow banks” such as IL&FS had clearly failed — though the earlier collapse of Sahara’s “parabanking” model should have raised red flags. Regulatory oversight and audit and rating standards have been tightened since, but the crisis in one of India’s largest non-banking finance companies constrained the credit system for many months.

 

IL&FS or the co-location scandal embroiling the National Stock Exchange underline the risks of assuming that institutions with sterling reputations can get away with less oversight. In NSE’s case, remarkable —and hugely entertaining — revelations of the managing director and chief executive officer sharing sensitive information with a mysterious Himalayan Yogi presents a disturbing picture of governance standards in institutions that are supposedly professionally run.

 

But whereas these crises impacted the domestic business ecosystem, Satyam, Ranbaxy, and Byju’s caused international reputational damage. Satyam’s stellar board comprised worthies from Harvard and Silicon Valley, all of whom remained blithely unaware that funds were being siphoned off.

 

Ranbaxy, run by two brothers from a storied business family, was feted for research breakthroughs and exports to the United States. It attracted more accolade when Japan’s Daiichi Sankyo acquired a majority stake in a $4.6 billion deal, the largest in the domestic pharma industry till then.

 

Six years later, a whistle-blower revealed fraud of the worst order — substandard manufacturing, counterfeit drugs and all manner of dodgy practices. The book The Truth Pill reveals in shocking detail the selective short-sightedness of the Indian drug regulator. Ranbaxy was under US Federal Drug Administration scrutiny before Daiichi invested, a fact it omitted to disclose to its Japanese partners. Byju’s, India’s first unicorn, went about acquiring assets with gay abandon during the Covid years and is now mired in debt, a US court case over loans and concealment of funds, and accusations in India of misleading customers. Who was monitoring this company? 

 

It is possible to argue that business scandals occur worldwide. Certainly there is no shortage of them in the US. The problem is that India, always thirsting for foreign investment, can least afford them. Whatever its entrepreneurial talents, governance remains India Inc’s soft underbelly.