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Partners Column

December 2, 2013

Corporate governance continues to be a pressing issue since the introduction of the Sarbanes-Oxley Act in the U.S. in 2002, which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies such as Enron and WorldCom.

In India too, over the past few years, trust in political and business institutions has seen a sharp decline as a series of corruption scandals rocked both sets of institutions. The crisis of confidence may seem to be a daunting challenge for regulatory agencies but it can also turn into an opportunity for reform for those wise enough to seize it.

Most companies strive to have a high level of corporate governance. These days, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behaviour and sound corporate governance practices.

What is Corporate Governance?

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term

What are the principles underlying corporate governance?

Corporate governance is based on principles such as conducting the business with all integrity and fairness, being transparent with regard to all transactions, making all the necessary disclosures and decisions, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner. Another point which is highlighted in the SEBI report on corporate governance is the need for those in control to be able to distinguish between what are personal and corporate funds while managing a company. Why is it important?

Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. It is also known to have a positive influence on the share price of the company. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs.

Poor corporate governance standards in India have been a major grievance of domestic and foreign investors alike for long. India’s National Stock Exchanges and Sebi have come under fire repeatedly from investor associations for not taking action against companies that failed to honour listing agreements. The International Monetary Fund is the latest complainant and has highlighted the lack of compliance with listing obligations as a key weakness in its recent financial sector assessment report on India.

Speaking at an event recently, Sebi Chairman Mr.U.K. Sinha pointed out that there are about 1,100 listed companies which are non-compliant with the requirement of clause 35 of the listing agreement. This means they have not filed their shareholding pattern in compliance with the SEBI rules. He expressed disappointment at the quality of filings companies make, and stressed the need for exchanges to hire more people to monitor whether companies are complying with the letter and spirit of listing agreements.

Sebi has come up with detailed guidelines for stock exchanges to ensure compliance with disclosure norms. Sebi directed exchanges to follow up on companies at every stage of key corporate developments, after receiving such information from other sources or even take suomoto steps.

The recent moves of India’s capital market watchdog, Securities and Exchange Board of India (Sebi) to improve corporate governance norms of listed companies must therefore be seen as a welcome step in the direction of reform. But much still remains to be done. Following the recently amended companies law that put the spotlight on corporate governance issues, Sebi’s latest directives can help raise the bar on corporate governance in India if the regulator, in league with stock exchanges, follows up on its tough words with punitive action on erring firms.

Although SEBI has been propagating the importance of Corporate Governance for a long time but there has not been much success. However the signs are more promising this time. More companies now tend to tap capital markets abroad for funds and manage to benefit from higher corporate governance standards. A small but growing class of activist shareholders has emerged in India, which will add heft to the fight for greater corporate transparency. The ministry of company affairs has come a long way in the path towards greater corporate governance, if the provisions of the recent companies’ law are to be taken seriously.

It is now Sebi’s turn to up the ante on corporate governance once again. The Securities and Exchange Board of India (Sebi) is likely to come out with detailed guidelines on disclosure requirements for listed companies after several companies were found flouting rules on continuous listing requirements.

The benefits to Indian markets may not accrue immediately but the long-term benefits of financial stability make it well worth the fight.

Best Regards
Rashida Adenwala
Founder Partner.
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