Listed companies face threat of rising compliance cost

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: The proverb of modern times says that we have to run faster and faster just to stay at the same place. Listed companies nowadays are having a similar experience – a déjà vu of sorts - that there are more and more forms to be filled and more and more compliance to be made just to remain listed. And it is not mere form filling and other clerical requirements. Substantive and often seemingly irrational requirements are being made of listed companies. A good example of this is the requirement of half of the board of directors to be independent directors and not promoters, though promoters may be holding, say, 75% of equity shares. Even private equity and venture capital investors do not ask for board seats beyond their proportionate holding, if at all they ask for significant board membership.

It could be said that even in the US, the Sarbanes Oxley Act has increased the costs of compliance there too and these are necessitated considering the scams in cases like Enron. However, it is futile to compare India with the West – the problems and circumstances are different and hence the solutions have to be different. In the West, unlike India, promoters and management do not hold significant shareholding. In India, in fact, more often than not, the promoters hold majority shareholding. They are certainly entitled to a different treatment and, indeed, more respect, as they put in far larger percentages in the company through their own money. In the West, the concern and conflict of interest is of non-owners controlling a listed company while in India, the situation is opposite. Those in management are very significant owners and hence the concern is more of protection of the public minority shareholders. Another good example of differing problems is the recent controversy of backdated options being given to the promoters/executives. Such a problem would be almost non-existent in India since, firstly, promoters already hold large shareholding. Even more importantly, guidelines framed by the Securities and Exchange board of India (Sebi) wisely provide that promoters should simply not be given share options. When promoters cannot at all be given share options, the question of backdating simply does not arise.