Debating India


Corporate Governance

Wednesday 6 April 2005

THE CAPITAL MARKET regulator, the Securities and Exchange Board of India, has deferred by nine months the institutionalisation of new governance standards in India. Such a postponement is neither unexpected nor new. In August 2003, after deliberating on and incorporating the views of at least three expert committees, SEBI decided to make companies comply with specified governance standards. However, implementation of the decision was put off to April 1, 2005 in the face of opposition from companies. Basically, companies were to be benchmarked against international norms on matters such as the composition of the board of directors. A fixed percentage of the board would comprise independent directors, with clearly defined profiles and roles in governance. The company’s principal officers would be held personally responsible for certain acts of omission and commission. The working of subsidiary companies would be reviewed by audit committees of the parent. Rather than make sweeping amendments to corporate law, it was decided to amend specific clauses of the listing agreements that companies enter into with stock exchanges. All companies whose shares were quoted on domestic stock exchanges would be required to comply with the new provisions and it was for the designated stock exchange to ensure that it was done. The latest postponement comes after the Government, SEBI, and the stock exchanges received a number of requests from companies that claimed that they were still unprepared for such a far-going change of rules of the corporate game.

To a large extent, the proposals that have been objected to remain. Only a few that were considered to be particularly onerous or impractical have been diluted. The core recommendations have eluded a reasonable consensus. The difficulties have invariably been at a practical level. A strong case has been made by industry associations to modify the rather stringent rule regarding independent directors. Family-owned businesses are reluctant to induct that many outsiders to their boards. Another basic problem is finding competent people to serve as independent directors. The moves to make directors and senior officials personally liable will probably act as a disincentive in top corporate jobs; they will almost certainly raise the cost of regulatory compliance.

There can be no two opinions that Indian companies must strive to match global standards of governance. But there is a need to frame new regulatory rules for better governance in keeping with Indian ground realities. Merely transplanting ideas and regulation from the West might prove counterproductive if the basic differences between the two situations are ignored. As it is, enforcement of regulatory rules has been lax: SEBI’s experience with capital market regulation will surely bear out this generalisation. Morever, the legal machinery is slow. In the West, investor awareness and shareholder activism have kept company managements on their toes and, in many instances, have discouraged unethical behaviour. These factors are still extremely weak in India. At the present juncture, authorities would do well to prioritise core standards that must be followed while leaving the rest to be adopted voluntarily. The realisation that good governance is good business will surely drive many companies in the right direction.

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