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Corporate governance blues

The advent of proxy advisory firms has given a boost to shareholder activism

July 27, 2014 11:32 pm | Updated 11:32 pm IST

It is not often that a regulator in India delivers a no-nonsense speech that sends out a clear and blunt message to those regulated. The Chairman of Securities and Exchange Board of India (SEBI), U. K. Sinha, did that at a meeting of the Madras Chamber of Commerce and Industry last week in Chennai. Doing some plain-speaking on issues of compliance with regulations by the corporate sector, Mr. Sinha compared the state of regulation in the country with that in developed markets.

Perhaps he was provoked by the comments of an earlier speaker — an industrialist, of course — who complained about dealing with multiple regulators and excessive regulation diverting focus of companies from the business. In a spirited defence of SEBI’s ‘activism’, Mr. Sinha pointed out that regulations in other countries were stricter than in India with regulators beginning to penalise the management and executives of violating companies in addition to penalising the company.

Referring to threats by the corporate sector that investment would shift abroad if regulations turned excessive, a combative Mr. Sinha asked: “Which regulatory jurisdiction will you go to?” The speech did not get much play in the media unfortunately but Mr. Sinha’s body language and the tone of his speech left little doubt in the minds of those present in the audience that the regulator meant business.

The Cairn episode Ironically, even as Mr. Sinha was speaking, the shares of Cairn India were tanking in the market following revelations that it opened up its overflowing coffers to an unnamed group company with a $1.25-billion loan on generous terms. The Vedanta group company had not disclosed this transaction with a related party to its shareholders nor had it informed the stock exchanges given that it was a material transaction. The deal was shared with analysts in a post-earnings conference call. Worse, even before the loan was disclosed, $800 million had already been transferred to the group company that Cairn did not even care to identify.

Under the terms of the new Clause 49, which will be effective from October 1, this would count as a violation because listed companies are required to seek shareholder approval for related party transactions. Of course, Cairn could argue that the regulations do not apply now but Clause 49 does give a company the choice to seek shareholder approval even before the provision comes into effect on October 1. A company that upholds the best corporate governance practices would have taken the choice to comply but not Cairn. Incidentally, only a couple of months ago, Cairn’s interim CEO P. Elango stepped down without giving reasons.

Interestingly, Cairn’s board boasts of four independent directors of good repute — retired IAS officer and former Cabinet Secretary Naresh Chandra; well-known economist Omkar Goswami, former CEO (Asia Pacific) of HSBC; Aman Mehta; and Edward T. Story, founder of SOCO International Plc, a LSE listed company.

The loan was also cleared by its Audit Committee, which has independent directors. How did the so-called independent directors clear such a proposal? Why didn’t they insist on prior intimation to the stock exchanges? As much as 40 per cent of Cairn is owned by non-promoters and these shareholders deserve to be informed of such a material transaction even if Clause 49, as it now exists, does not mandate prior approval by them.

The Cairn episode, which is just one example of bad behaviour, exemplifies everything that is wrong with corporate governance practices in this country. It also underlines why we need tight regulation and justifies the tough talk by the SEBI Chairman. While one does understand that excessive regulation can be stifling to business, it also needs to be pointed out that bad corporate governance necessarily attracts regulatory attention. We are entering an era of shareholder activism in this country as manifested in the recent examples of Maruti and Tata Motors. In February, Maruti’s parent Suzuki Motor Corporation was forced to alter the terms of its investment in a new plant in Gujarat after Maruti’s shareholders objected to parts of the deal seen as unfavourable to them. Similarly, last month shareholders voted down Tata Motors’ proposal to pay higher remuneration to three of its top executives on grounds that the company was making losses.

The advent of proxy advisory firms in the last couple of years has given a boost to shareholder activism; electronic voting has helped greater shareholder participation in important company meetings and resolutions. Firms such as Institutional Investor Advisory Services, founded by Anil Singhvi, InGovern and Stakeholder Empowerment Services, founded by former Executive Director of SEBI J. N. Gupta, have upped the corporate governance stakes. These firms keep a close watch over listed companies and blow the whistle when they spot shareholder unfriendly practices. Clearly, the best course for companies is to take the advice of the SEBI Chairman seriously and spend time on compliance. In the emerging context, the cost of compliance in terms of time and effort is small compared to dealing later with regulatory penalties and the bad publicity that accompanies it, including de-rating of the stock. Ask Maruti and Cairn.

raghuvir.s@thehindu.co.in

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