Most Indian firms floundered on disclosures in five key governance areas in FY15, approaching them more as a tick-box compliance exercise, according to a Deloitte study.
For the first time, annual reports reflected governance and disclosure changes in 2015 as laid down in the Companies Act 2013 and Securities and Exchange Board of India’s Listing Obligations and Disclosure Requirements Regulations, 2015. Disclosures in areas like board evaluation, internal financial control, enterprise risk management, compliance management framework and related party transactions in 100 listed Indian companies across industries and geographies were studied. Indian companies had for the first time carried out a formal annual performance evaluation of the board, various committees, directors and the chairperson.
At least 63 per cent of companies failed to disclose the manner in which they had conducted the annual evaluation of their board in their annual report despite this being a mandate as per the Companies Act, 2013.
While 98 per cent of the companies disclosed that the directors had laid down Internal Financial Controls (IFC) to be followed by the company, 87 per cent did not disclose if the technology tools supported their IFC. Nearly 37 per cent also did not provide any details on the framework, policy or system for IFC. Stepping up disclosures on IFC will instil a greater degree of confidence among stakeholders, the study said. On enterprise risk management, 74 per cent disclosed the elements of risk, which in their boards’ opinion, may threaten the company’s existence. However, 52 per cent have not disclosed to their shareholders how they plan to mitigate these risks.
The companies have been cautious in reporting while remaining cognizant of the potential business challenges and risks. However, additional declaration on the risk mitigation plans could assure stakeholders that the risk challenges are being addressed effectively.
On compliance, while most companies adhered to the mandatory requirements, there is scope for further improvement in their voluntary efforts, it said. About 71 per cent did not give any details about the compliance management framework or organisations’ structure/reporting mechanism.
Unlike other areas, disclosures of related party transactions allude to greater objectivity and clarity. This is perhaps because the Act itself is comparatively more prescriptive on RPT disclosures than in the other four areas. In order to realise the spirit of corporate governance reform, Indian companies will have to pursue governance as an ever-evolving and constructive value accreting process, the study said.
