Corporate governance norms promote outbound investments

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: The quantum of outbound investments in India has been increasing exponentially. In 2007, the amount was to the tune of $33 billion. Of course, a couple of very large transactions such as Tata-Corus and Hindalco-Novelis have skewed the figures somewhat. Having said that, the fact is that Indian companies are increasingly making acquisitions abroad at a scale which could not have been thought of a few years ago.

A very interesting dimension of this trend is of smaller or at least mid-sized companies increasingly getting into the act in terms of making these acquisitions or entering into Joint Ventures (JVs). In the context of the economic slowdown that seems to be setting in globally, this might be a good opportunity for Indian companies to acquire a global footprint.

Indian companies have been viewed by the world outside (especially by the West) as family controlled and not professionally managed. The fact that Indian industry has made substantial strides in terms of their corporate governance processes and professionalising their management is still only hesitantly accepted. It is important to recognise that this professionalism is not across the board and the development and progress on this front is quite uneven.

Is this relevant to outbound investments? The answer to this is a resounding yes. The reason is that a potential overseas seller or JV partner could look at a potential Indian acquirer from the perspective of the acquirer’s overall credibility, not just financial standing. This credibility would often be demonstrated by the professional attitude of the acquirer. Clearly, a company which is well governed, even if family controlled, would stand a better chance of making the acquisition or entering into the JV because there would be a cultural fit, both in the context of an ongoing relationship (such as a JV) and indeed in consummating a potential transaction. The corporate governance practices in the West are characterised by majority of outside directors on board, an active and strong audit committee, stringent provisions for assuring the independence of auditors, detailed disclosures and financial reporting norms, heavy penalties and prosecutions for violations.

In India, Section 292A of the Companies Act, 1956, requires public companies with paid up capital of Rs 5 crore or more (listed or unlisted) to constitute an audit committee and also prescribes its powers and role to ensure a better corporate governance. In March 2003, the Naresh Chandra Committee also recommended various measures to fortify Corporate Governance code. The recommendations had formed part of Companies (Amendment) Bill 2003, but the Bill was withdrawn after numerous objections.

Although some disclosures and transparency are required by the statute, ‘corporate governance’ can never be reduced to a set of rules in the market regulators’ rulebook. It is about attitude towards stakeholders and a sense of equity and fairplay. Large corporate groups in India often have their own corporate governance policies which, in some cases, are much more comprehensive.

In case of small and mid sized companies, not governed by the above regulatory framework, the disclosures are often inadequate.

The issue that arises then is what are the steps that companies must take. It is important to recognise that a corporate governance perspective is more of a culture and a mindset rather than being mandated by law especially in the context of the unlisted Indian acquirer companies where several of the regulations outlined above would not even apply.

Regardless of statutory applicability, having a robust board of directors is important. Having reputed advisors both on an ongoing basis and for the transaction is usually costlier, but is a sign that the acquiring company has inbuilt corporate governance checks.

Employing talented and professional managers, even if the company is family controlled, sends out a strong corporate governance signal particularly in these days of talent crunch. It may be an expensive proposition, but it’s worth it when a company is seeking to make global strides.