Even as we continue to see stocks of various companies with high-pledge shareholding tumble, Kotak Institutional Equities has called stronger corporate governance standards in Indian promoter group companies. “We see a need for stronger corporate governance standards in view of (1) the recent spate of allegations of impropriety in and (2) revelations of ‘large’ debt of majority shareholders/promoters of a few large, listed Indian companies,” Kotak Institutional Equities said in the report. Notably, in the recent times, investors have started selling shares of firms with high-pledge shareholding after the promoter of the Essel Group had failed to bring in fresh shares as collateral to make up for the crash in stock prices.
According to the research firm, additional disclosures on financials and the debt position of all unlisted entities of promoters with a majority or significant ownership (more than 26%), that hold shares of a listed entity would help minority investors better assess the true health of Indian promoter groups. “Current disclosures on pledged shares of promoters and related-party transactions of listed entities are helpful but fall short of providing a complete picture to minority shareholders,” noted the report.
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Kotak Institutional Equities said that the Indian regulators could consider restoring circuit limits for all stocks; currently F&O stocks do not have any limits for upward or downward movements and exercising their extant powers to suspend trading in a stock in case of an extraordinary event. “We understand that there is a fine line between maintaining the sanctity of the market and over-enthusiastic regulation but we believe wild allegations and equally wild market responses serve little purpose and probably dent the confidence of small investors in the market,” noted the report.
The report noted that promoters alone can be held responsible for financial impropriety when an independent board of directors oversee the conduct of the firm’s management. Hence, the regulators may be compelled to implement stricter standards for directors of companies. “The threat of regulatory action (including complete ban from all directorships) will either spur directors to exercise their fiduciary responsibility better or quit boards of companies that appear to violate the spirit of corporate governance,” said the report.