The world of capital looks for predictability, transparency, and unambiguity, while dealing with companies in which such capital is invested. It relies on the prowess of gatekeepers for safety and regulators for enforcing the rules of engagement, should one deviate from the straight path.
Any management action or event which undermines this faith and trust or disturbs the equilibrium of expectations, leads to rebalancing and may have a devastating effect on the company, capital markets, and even the country. The aftermath of the Satyam fraud saw the Sensex index on the BSE losing 7.3% and the government of India taking over its management. In the case of Infosys, the IT major lost Rs 30,000 crore in market value in intra-day trade following the resignation of its previous CEO amidst allegations of failing governance. In recent times, we have witnessed a steady fall in ICICI Bank’s share, following allegations of impropriety in approving loans, which eventually turned bad.
The faith of the business world in a company is often dependent on the exhibited and sustained transparency, quality, and robustness of its reported earnings, which is interpreted as an outcome or culmination of its corporate actions and processes. However, reported earnings is often opaque and is a complex interplay among accounting assumptions, events, tangible transactions, and interpreted truth. Its governance sits on three pillars—management and its motivations; standards and laws in the country; and effective oversight and enforcement of such laws by the regulators and courts.
Let’s take the second pillar first. Indian lawmakers have been able to legislate some of the best laws, standards, and rules for governing the corporate world, which many studies have rated at the highest quartile in the world, in terms of depth and relevance. However, rule of law is evident only in its enforcement and swift remediation of every transgression (the third pillar)—an area in which India languishes at the lower end of the league table. The strength of the first and third pillars is, therefore, our insurance and safety mechanism.
If owners and management are entrenched in their ownership, like most Indian listed companies are, they can push the boundaries of legal and regulatory frameworks to further their own goals. This, in governance parlance, is called management’s motivation. To balance this possible abuse, the law requires gatekeepers such as independent directors, auditors, and compliance professionals to step in and resituate the rights and positions of the unrepresented at the Board—minority shareholders, employees, and the larger capital market. However, Boards often end up backing the owners or management in cases of conflicts with other stakeholders. The independent directors, too, have not, in most cases, stood up to be counted.
In the ICICI Bank case, in response to the NSE’s clarifications on a loan to a Videocon enterprise—in which a relative of its CEO may be interested—the bank stated that its Board was satisfied with the process followed for the loan after it met on March 28, 2018, and “considered all the facts including the internal review undertaken in 2016” when the issue first got surfaced. The Board concluded that there was “no question of any quid pro quo/nepotism/conflict of interest” and went on to commend the CEO and the management for their performance in a public statement.
The question of what is due process for a Board to make such assertions will be determined in the courts or by the regulators. Whether the Board, where nearly half of the outside directors were not members of the Board in 2016, could rely on internal investigations of 2016 to confirm propriety of conduct is a question of standards of good governance. Should they have taken opinions of external experts on a current date to vindicate their stand, especially when the CEO was a member of the credit committee which approved such loans? What is a Board’s remit in making public statements of support to the management when a complaint is made by a whistle-blower?
That brings us to the last pillar of governance—oversight and enforcement mechanisms. In this case, bodies such as RBI, SEBI, SFIO (Serious Fraud Investigation Office), and the courts of law uphold our social and economic interests. Bibek Debroy, the member of the NITI Aayog, once estimated the probability of conviction for a white-collared crime in India to be 0.006, which, statistically (and logically), makes crime profitable. The deterrent mechanism, whether by SEBI, MCA (ministry of corporate affairs) or ICAI (Institute of Chartered Accountants of India), till recently, has rarely been punitive: a report of the Thought Arbitrage Research Institute (TARI) with the Indian Institute of Corporate Affairs of the MCA, says that for frauds committed under the Companies Act, 1956, the average fines imposed have been less than Rs 3,000 and nearly 80% of criminal prosecution cases filed by SEBI have resulted in no sentencing. With a judge-population ratio of 17 per million—when the developed countries have 50 judges per million—and a pendency of nearly 30 million cases, it is another cause of concern. So is the lack of adequate judges in the Debt Recovery Tribunal (DRT) and the National Company Law Tribunal (NCLT). Therefore, collectively, the pillars of governance of India rest on weak ground.
However, are there winds of change? The action of not following the law has punitive consequences under the Companies Act and other laws. This creates deterrence, and today, Boards spend a large amount of their time looking at controls, compliance and risks. Regulatory agencies increasingly use technology to monitor, tag, and analyse data from diverse sources and use experts to help them build fail-safe cases for prosecution. The action of the government in case of fraud is agile, reflected by the rise of cases investigated by SFIO, and CBI in a time-bound manner, or the manner in which it tackled the menace of black money and fraud through shell companies, or dealing with bankruptcy, or wilful bank defaults. The pressure tells, and our business icons who step out of line are often seen falling down like a pack of cards into a world of disrepute.
Is that enough? Respect for law in a feudal society like ours comes only when law is upheld—time and time again—and institutions are robust and stand up without fear or favour. If institutions of governance, and gatekeepers such as independent directors, auditors or the regulators, behave like handmaidens to those in power, and control or hide behind thin veils of legalese to defend their decisions, then the term ‘governance’ in India will continue to be a well-defined word only in the dictionary, but with little relevance for citizens.