Philip Armstrong, senior advisor, corporate governance at International Finance Corporation (IFC), feels corporate governance in India is steadily improving. In a chat with Nitin Shrivastava, he says that though regulations in India are among the best globally, what is lacking is enforcement and that corporates should follow corporate governance practices not just in letter, but also in spirit. Excerpts:
IFC continues to assess multiple potential investments at any point of time. How important are the environmental, social and governance (ESG) factors in making the final call on investing in a particular firm?
Once we have gone through the investment process, every transaction IFC undertakes has to go through the E&S process — environmental and social responsibility. We look for factors like whether the company or business creates jobs and transforms society while having financially and fundamentally sound prospects and management. On the corporate governance side, we don’t look at every single company; what we do is try to look at high-value transactions or where there is a high appearance of risk in the business. At the same time, we do not use ESG assessment to negatively screen companies for investment, but seek to identify the risks and, accordingly, plan how we should go about improving the company’s value.
How do you rate India in terms of corporate governance?
In terms of laws and regulations, India is definitely in the top half; the weakness lies in the enforcement. It takes a long time to take action against any corporate misdemeanour. For example, the recent prosecution of Satyam was probably by Indian standards quite quick, but it takes you a long time to take action against some significant corporate misdemeanour. To me, the real issue is that no matter how updated the laws might be, they should be consistently and effectively enforced in a timely manner because that develops a culture of compliance in the companies so that they know that the laws are not to be negotiated, that the laws are meant to be enforced. However, recently it’s being noticed that Sebi has certainly improved its enforcement capacity. That has sent a very strong signal in the markets, domestically and outside. To summarise, in terms of corporate governance, India is definitely in the top half, but regularising laws and enforcement is an issue.
Which are the sectors or sort of companies that IFC finds it difficult to invest?
As an organisation, we normally do not invest in state-owned companies or businesses that have political linkages or affluence. Similarly, the tourism industry is very difficult to invest in, not that we don’t invest here. This sector is difficult to regulate and supervise. It tends to embrace a much more complex set of circumstances. There are issues around the culture, environment, etc. It’s a difficult area to engage in. We feel there is strength in the banking sector. We are very active in the oil and gas and the mining sector. We are helping a lot of large mining MNCs, helping them in supply chain, services, etc.
India continues to remain IFC’s largest portfolio exposure at nearly $5 billion. What are the main issues you see with regards to corporate governance in India?
The boards needs to be carefully chosen; professionalism and independence are required. The selection of independent directors should not be just a box-ticking exercise to meet regulatory norms; it needs to be value-accretive, and independent directors should provide real strategic guidance based on their professional expertise. Also, gender diversity needs to be there, as it adds another measure of thinking and skill-set in decision-making. The second thing is related-party transactions. Indian companies need to take an independent consideration of such transactions, it is an area of great risk. The third issue, I would say, is a lack of focus on environmental and social responsibility with respect to committing time and efforts for uplifting community. The final problem in my opinion is the role of institutions in India in scrutinising the work of the auditing profession and corporate governance.