Newsletter Category: 2024

Diwali and the impending new year are harbingers of hope, and offer the opportunity to address the possibility of change, hopefully for the better. It is in this background that this newsletter looks at a major issue that has been occupying significant mind space.

For some weeks now, the media has been speculating on whether the present Chairperson of SEBI will stay till February, 2025 or leave before her term expires, or for that matter, be reappointed to serve another term.  The answer to these questions is firmly rooted, in most cases, in the personal beliefs, biases or even ideological leanings of those that have chosen to express their views. The objective in addressing this here is not to dwell on the individual concerned, and the period for which she will continue to hold her present office. The procedural and substantive issues which should underlie the selection and appointment of the Chairperson of SEBI is what should merit our attention.

Before getting to the larger issues, it is best to address those that have no basis whatsoever in fact or in law. The first of these is whether a person from the private sector should be appointed as Chairperson or Member of a regulatory organisation. There is nothing in law or regulations to prevent such an appointment. What is more, there have been instances in the past where persons from the private sector were identified as the right candidates and appointed to occupy regulatory positions.

An equally, if not more, irrelevant question, is whether such appointments ought to be a male preserve. In addition to recognising that such a provision, if enacted in law, would run counter to Constitutional provisions, it is appropriate to recall that many women of substance have held regulatory positions, and have distinguished themselves in the discharge of such responsibilities. Tangential issues, such as gender preferences, in regulatory appointments, should not detract from the real issues involved.

Addressing the specific requirements of SEBI, it is useful to recognise that SEBI is neither an attached office nor a subordinate office of the Government of India. It is a creature of statute, and should not be equated to, or treated in similar fashion as, an organisation set up by an administrative instrument. For it to discharge its duties impartially and independently, it is necessary that it has the functional autonomy to do so, and equally importantly, is perceived as having the functional autonomy that should characterise its working.

For functional autonomy to become a fact it is necessary that the Government of India does not become the single authority to decide on the incumbent of this office. There was a practice in the past where the Selection Committee was headed by a distinguished individual with a very high standing in the financial sector. To strike a personal note, when the author of this piece was selected, the Selection Committee was headed by Dr. C. Rangarajan, a person whose standing and accomplishments do not require elaboration. In subsequent instances, the Selection Committee came to be headed by the Cabinet Secretary. There are two issues involved in having the Cabinet Secretary head the Selection Committee. The first problem is that the organisation could be perceived to be a subordinate office of the Government of India. Secondly, even though the position of Cabinet Secretary is the highest in the civil service, it is not reasonable to expect that the holder of that office would necessarily have a good understanding of the securities market, and therefore, of the kind of person required to be selected for that position. The present incumbent, with formal professional qualifications, and a lifetime of experience in the financial sector, is a glorious exception.

What should a Selection Committee be looking for when identifying a suitable candidate? The SEBI Act, which provides for the appointment of the Chairperson, is not helpful in this regard. Dr. Rangarajan, with whom I broached this subject, a few months after I had been appointed, mentioned that ideally the candidate selected should have at least the following 3 qualifications. Firstly, he/she should have been a part of the financial sector, even if that is not his/her main area of expertise. Secondly, the person concerned should have a qualification in law because understanding, writing and enforcing regulations will gain considerably if the head of the organisation has a clear understanding of the prescriptive arrangements that are being put in place, and how they are to be enforced. The third requirement, identified by him, is that the person selected should have headed at least one organisation in his/her career, prior to being appointed as Chairperson SEBI. It is entirely possible that another Selection Committee will come up with other necessary attributes required to be had by the selected candidate.

The nature of the Committee needs to be revisited. The present practice seems to be to invite applications from persons desirous of being considered for selection. While such an approach is not to be decried, it should not be the only manner in which possible candidates are sourced. It is necessary for the Committee to be a Search-cum-Selection Committee, so that in addition to considering the appropriateness of the applicants, the Committee could look for persons who fit the bill, but have not chosen to throw their hat in the ring. The credibility of the organisation will gain significantly, if a suitable person is persuaded to accept the position, rather than to compete for the position. The related procedural step of having a short interview with the candidates, with the interview being conducted by a Committee, all of whose members do not have domain familiarity, should be suitably modified to provide for in-depth conversation, including, but not limited to, ascertaining the vision the candidate has, with regard to the responsibility of heading the organisation.

There is also the question of accountability of the Chairperson, subsequent to appointment. Presently, the accountability would seem to lie to the Ministry of Finance, and in a sense, the Government of India. Considering that there are public sector entities that are also regulated by SEBI, the possibility of pressure being exerted by Government functionaries on SEBI cannot be ruled out. The ideal situation would be for the organisational head to report twice a year to the appropriate Committee of Parliament. Such an approach would strengthen the concept of functional autonomy, while ensuring that the organisation remains accountable.

In countries like the USA, every person identified for appointment to an important office has to appear before a Committee of the House or the Senate, which would then assess the credentials of the person, as also look at the past track record or any other matter that might negatively impact the functioning of that person in the office to which he/she is proposed to be appointed. Such an approach might reduce, if not eliminate, the possibility of complaints of lack of credentials and suitability, subsequent to the person being appointed. Post appointment mud slinging is never the best way for the head of a regulatory organisation to get started on the assignment.

In the Indian context, the best procedure would be to have a Search-cum-Selection Committee, headed by a very distinguished person, preferably from the area of finance, with Committee members selected for their ability to contribute to the process, rather than being ex-officio members of the Committee. Having shortlisted the candidates, the Committee should invest adequate time in studying the past track record of each candidate, and in ascertaining whether the candidates have, in their minds, a roadmap for the organisation for the next few years. A candid conversation, rather than a question and answer session, would be the appropriate method to yield the right results. Once the Committee identifies a suitable candidate, he/she should be requested to appear before the Consultative Committee of the Ministry of Finance, so that members of that Committee can have a constructive pre-selection conversation with the concerned candidate. All reservations and doubts should be addressed during that conversation. It is only when the Consultative Committee clears the candidate, that the candidature should be put up to the Appointments Committee of the Cabinet for approval, and for issue of orders. Such a procedure would be a confidence building measure that will positively impact the credibility of the organisation.

News reports are abuzz with speculation on who is likely to be next Chair of SEBI. Names are being trotted out, based on track records in their present or previous positions. Considering that there is not too much time to complete the process of selection and appointment, presuming that there is no reappointment, it is imperative that a good robust process should be firmed up, and the selection in accordance with that process should be fast tracked. Absent that, we might witness the unfortunate spectacle of the present Chairperson’s term coming to an end, and no one being appointed, in time, as a successor. Such a possibility will lead to jockeying which an organisation of such importance can ill afford.

Tailpiece

Long years ago, an incumbent Chairperson was asked why he was not appearing for an interview for being considered for another term. His response was that “he was not a supplicant, not an applicant, a candidate or a job seeker”.

For some time now, auditors and Audit Committees (ACs) have been the subject of relentless scrutiny by the Regulators and by several other stakeholders. Reflecting this increasing concern, a Whole-time Member of SEBI very recently advised the audit professionals to be extra careful when auditing the accounts of SMEs. While the observation might have contextual validity, it is useful to remember that size of the auditee is no guarantee of good conduct. There have been, and continue to be, transgressions, and worse, that auditors have either not caught on to, or glossed over, as far as large companies are concerned.

NFRA has recently observed that ACs cannot hide behind auditors. What is perhaps intended is the advice that the AC must challenge the auditors sufficiently, to get at the true state of affairs, as far as the financial statements are concerned. Needless to say, auditors should push back strongly to see that the AC raises the questions it needs to raise, to get management to stick to the straight and narrow path.

This is a fairly logical and a simple expectation. It is therefore useful to see why it does not play out with as much regularity, as stakeholders would like it to.

In a recent roundtable that Excellence Enablers conducted, one of the issues highlighted was that the ACs were not equipped in terms of expertise or experience to discharge their multifarious responsibilities. While the Chairperson of the AC would be a well versed financial professional, who can assure a constructive interaction with the auditors, the requisite expertise is not available with most of the members. In some ACs, therefore, they remain occupants of ringside seats, while the Chairperson and the auditors engage in a productive conversation. This situation goes to the root of the constitution of the AC. This is best illustrated by a recent case in which a senior retired person from the armed forces mentioned to the regulatory agency that he did not have the requisite expertise to ask the right questions, nor was he told that it would be required, before he was made a member of the committee. Being a former senior professional from the services, he was predictably forthright. This cannot be said of several other members who effectively hide their ignorance, while AC meetings take place. The problem perhaps is that the way the Boards are composed, they do not have enough persons with an adequate knowledge of accounts or audit to be made members of the AC. Their understanding of the business could also be patchy.

Given the significant role of the AC, anything that emerges therefrom is almost routinely lapped up by the Board, without discussion or debate. Therefore, unless the composition is addressed, and an adequate number of persons, with the requisite experience, are placed in ACs, the problem is unlikely to go away in a hurry. Courses such as finance for non-finance executives can travel thus far, and no further.

One of the shocking conclusions that emerged from the roundtable was that there was an acute shortage of auditing personnel of good quality at the entry level in audit firms. With the restriction in the number of persons who pass the CA examinations, the broader universe has somewhat shrunk. More to the point, many of the newly qualified CAs do not consider audit as a worthwhile career choice for a variety of reasons. Many of them gravitate to secure jobs in corporates, or join startups, or as has been noticed for quite some time, opt for investment banking, or some such rewarding career options. With an increasing number of listed entities, and a significantly large number of unlisted entities, there is a perpetually increasing demand for auditors. If there are supply side constraints, getting quality audits done of an increasingly large number of firms is going to remain a major challenge. It would be for the professional representative body to get to grips with this problem, and to put in place worthwhile solutions, without loss of time.

In recent months, NFRA has come down heavily on auditors and audit firms, who have been found to be remiss in ensuring the quality of audit. Understandably, this has introduced a sense of deep disquiet in the auditing profession, especially considering that the firms and auditors being pulled up, and punished, belong to the largest audit firms.

If supply constraint is a problem in the auditing profession, the opposite is true of Independent Directors (IDs). A recent article has shown that as against a total of 9,603 positions of IDs on 2,394 listed corporate Boards, there are 31,151 persons who have qualified in the certification process, and got themselves enlisted in the databank mandated by the Government. It can be no one’s case that notwithstanding their having qualified in the examination, all these candidates are ready to hit the ground running. India is perhaps the only jurisdiction which has prescribed a qualifying examination, and consequent registration for IDs. There is no evidence to show that corporates, looking out for suitable candidates to fill Board vacancies, are making use of the database that the Government sponsored institute has compiled. To address this, the institute has recently reached out to search/ headhunting firms, requesting them to make use of the database that exists. Knowing the elaborate process which search firms go through, to identify suitable candidates, it is unlikely that the databank would be their first port of call. What will then result, if it has not already happened, is that persons whose names are on the databank, will have an increasing sense of frustration and demotivation at their not having been approached by any corporate for any position on the Board. The fact that they have paid a significant sum of money to remain on the databank further compounds the problem.

While focusing on auditors, ACs, IDs and Regulators, it is useful to remember that companies exist for the purpose of carrying out business. Too many restrictions, which are frequent and disruptive, will tend to adversely impact the ease of doing business. At the same time, Directors and auditors who do not measure up, will ensure that stakeholders lose confidence in the entire system, and look for other opportunities, including other asset classes. The task at hand is to ensure that the legitimate expectations of stakeholders are addressed, by ensuring a quality Board, and the existence of auditors who do not pull their punches, and cannot be easily fobbed off. Considering that these problems can be fixed only by a number of Regulators/ institutions sitting together, and looking into the future, it is necessary to get this consultative and corrective process started, and not to leave it too late, since the luxury of time is not available. There must be adequate fora at which each of these constituents exchange their experiences, and learn from the wisdom that resides elsewhere. As we have said earlier, experience is not the name that you give to your mistakes alone.

The excesses of a few promoters make shareholders look askance at the promoters of even well-governed companies. There is considerable truth in saying that IDs exist to save promoters from themselves. In the process, they will also be ensuring fulfilment of the legitimate aspirations of all stakeholders.

India, it must be remembered, is a large and growing market, which will see far more companies getting listed in the days ahead. In addition to qualified finance professionals, there will be a need for auditors with the right experience and quality. There will also be a need for good IDs to complement the role played by executive management, to ensure that growth and governance run hand in hand, especially in newly listed companies. Tinkering with the provisions of the Act and the regulations should be put on the backburner, while the apex bodies devote focused time and effort to address these systemic concerns.

Yet another area of concern is the adequacy of sufficiently experienced Chief Financial Officers (CFOs) in these challenging times. It is now increasingly recognised that the CFO is not a controller of accounts, as was wrongly believed in the past, but a very senior individual, who serves as a copilot of management, alongside the CEO. Clearly, a pure finance professional, with no other attributes, will not tick the box. It is necessary to have a sound understanding of business, and the external environment, in order to complement the efforts of the CEO to craft the appropriate strategy for the present and the future. There is no clarity whether CFOs, especially in the smaller companies, have the requisite wherewithal to measure up to the increasing and diverse demands that are placed on the CFO. No matter how well CFOs are compensated, there would be a tendency to move to start ups, and to bet on aligning their future growth and prosperity with that of the startup. This too could lead to loss of experienced professionals to head the finance function of large and medium corporates.

The constructive nature of the audit function, including that of the AC, depends significantly on a sound understanding of the business of the auditee company. This will ensure that audit is not seen as a fault-finding function, but as a value-adding element in the conduct of business of the company. Some companies ensure that in the finance and audit function, there is a small complement of persons who have directly discharged business responsibilities. This approach should inform the constitution of the AC, as well as the very critical function of internal audit, where in the absence of understanding of business, highly theoretical observations and objections could surface.

In the interest of the corporate ecosystem, it might be useful, even for large corporates to take a lead role in helping the smaller entities to measure up to speed, including by identifying the gaps that need to be filled, and aiding in the putting in place robust processes and practices.

Every organisation, product or process benefits considerably from periodic evaluation. It is contextually relevant to mention that if Boards and committees, especially the AC, are to satisfactorily discharge their duties, a robust evaluation mechanism should be put in place to identify shortcomings, and to persuade the Board to address those shortcomings. The stand “my Board has no problem” is the biggest problem that Boards need to address quickly and comprehensively.

Que sera sera won’t work. The future is ours to see.

Dear Chairperson,

At the outset, please accept my greetings of the Annual General Meeting (AGM) season. I am aware that this is a time when you, and others who are similarly placed, grapple with issues of painting the best possible picture of the company’s performance, and warding off inconvenient questions from pesky shareholders. Some years ago, an enlightened economist mentioned to me that in the opinion of Milton Friedman, the famous economist of his time, the primacy of shareholders was paramount, and it was obligatory in their interest for the companies to focus on maximising profits to the exclusion of everything else. Years later, some others, broadly grouped as stakeholders, got together to claim their place in the Sun. I, for one, am quite willing to live with the reality that but for other stakeholders, my company might not make profits, and therefore, co-existing with them, and hoping that there is no clash of interests, is perhaps the best way forward.

Reasonably well-informed persons tell me that a good Board of Directors is critical for the sustainable performance of any corporate entity. I have no quarrel with that premise. However, I often ask myself whether the persons who comprise the Board in my company are the best persons for the job, and whether their participation in Board meetings is helpful for the company to chart its growth and progress. All of them, I imagine, must have been inducted in the Board for the right reasons. It is entirely possible that at the time when they were brought on board, they were the great white hopes for the company. My concern is whether they have remained at the same level of engagement, commitment and performance over the many years that they have been in the boardroom.

A related question sometimes troubles me. I am aware that the Companies Act, 2013 prescribes that each term of a Director shall not exceed 5 years. Does that make it necessary, or is it a matter of administrative convenience, that every one of them is given a 5 year term, with no possibility of a mid-course assessment whether the person selected is able to pull his or her weight?

I am sure that having regard to the interests of the company, you have helped to select Directors with maturity and experience, and the ability and willingness to contribute effectively to the decision-making process. Since none of us is God, it is possible that some mistakes have been made by inducting persons who were not the most appropriate. Is there a way that you can address this before their 5 year term runs out, and you come to the shareholders saying that these are great persons who need to be given another term.

Staying with the subject of Boards, I am curious to know how the process of Board evaluation, and the evaluation of Directors takes place. Is it a robust exercise, meant to separate the grain from the chaff, or is it a box-ticking exercise, that leaves everyone happy? I notice that given the very large number of Directors in the corporate ecosystem, there are very few, if any, instances of a Director being found sub-optimal, and persuaded to leave the Board, in pursuit of better pastures. Absent this phenomenon, would I be right in assuming that evaluation is an exercise, the results of which are known in advance, and are even more predictable than the conclusions of a run of the mill movie?

I notice from the Annual Report that the company has meticulously captured, if that is the word, the skillsets of all the Directors. There is hardly any box that has remained unticked. Am I then to assume that these Directors, with multiple skills, are able to collectively pool their wisdom and their efforts to get my company to perform as well as it can?

Let me touch on another sore point. You perhaps know that some of the Directors are unhappy with the nature and extent of their compensation. Is that translating to underperformance? Is there also a mismatch between the compensation of promoter Directors and the Independent Directors (IDs) on the Board? I am reminded of the statement of the first Prime Minister of Singapore that if you give peanuts, you will get monkeys.

The question that often arises in my mind is whether my company is giving me the best returns that it can possibly give. I know that the company has a Dividend Distribution Policy. It indicates the approximate level for determining the payout to the shareholders. It is being increasingly noticed that retention is given more importance than payout, ostensibly because the company needs to preserve money, either for investments, or for a rainy day. Is this not a subversion of the fundamental principle that what is surplus should first be applied to the interests of shareholders? I also notice that there is sufficient cash sitting on the books of my company. I am confident that this is real cash, and not imaginary cash, as in the case of a celebrated IT company, which came to grief a few decades ago. My question is however whether all that cash is required to be retained in the expectation that it would come in handy for an acquisition or expansion, while shareholders wait with bated breath for bigger handouts than they have been receiving. This is not an easy question to answer, but I do hope that you will not, following a celebrated Central Bank Governor, say that this is out of syllabus, and the next questions must be asked.

Not being in the boardroom, or for that matter, being at a considerable distance therefrom, I often wonder what actually transpires in the boardroom. I understand that there are a number of agenda items, each more complex than the others, requiring to be decided. Is it possible to do justice to them, in the matter of two or three hours? Are there persons who contribute disproportionately, while others remain the strong silent types. Even Regulators are struggling to figure out the nature and extent of contribution by Board members.

This brings me to a related question that is not without difficulty. Why are all our Board members being compensated equally? Surely, there are some that perform better and some that underperform. Can the relative performance not be recognised and rewarded by higher compensation in the form of higher commissions?

I am told that the Nomination and Remuneration Committee (NRC) and the Board determine the compensation of the senior executives, and that this is done with regard to their performance in respect of predetermined KRAs. How is it that I then find that what is decided at the beginning of the year is invariably paid out at the end of the year, without factoring in performance? Is this an empty exercise that we, as shareholders, must watch with seeming unconcern from the sidelines? Considering that some initiatives will take time to play out, and will demonstrate that what has been done is not in the best interests of the company, can we have a provision for clawback, so that payments, not in sync with the outcomes of questionable initiatives, are at least partly taken back by the company?

The world and the economy are undergoing rapid changes. It is therefore necessary for Board members to periodically reorient themselves, and to measure up to the emerging challenges and the requirements of the future. Is this being done through well thought-out training programmes? I regret that the Annual Report does not shed much light on this aspect.

I am aware that the Board of Directors operates through different committees, each with its assigned functions and responsibilities. Is there information asymmetry which results from the same Directors being members of the same committees throughout an extended 10 year period? Would there be merit in looking at some form of rotation, having regard to their aptitude and their experience? I also find that some Directors are in either no committee or in one committee, while others are in almost all of the Board committees. Considering that these are all experienced persons, who are in a position to contribute, should there not be a more even distribution of the committee workload among the Board members?

There have been reports in the media pointing to high rates of attrition, as well as exits by senior executives. I notice that attempts are being made to explain away attrition by stating that it is an industry phenomena, or pointing to the homing instincts induced by Covid. Sometimes high rates of attrition, especially at the junior levels, are attributed to the non-stickiness of the younger generation, as distinct from those of my generation, who were “lifers” in a single company. No matter what the primary cause is, I am sure that you have put in place measures to address the problem of attrition. Is ours a company that people enjoy working for? Is ours a company where in addition to the basics of security and safety, the feel-good factor exists in the workplace? Is this an area that, in your view, our company needs to work on?

As for senior level exits, do we have a well thought-out robust succession planning to ensure that no critical position remains vacant? I hope that we are not resorting, like many others, to multiple hatting when a vacancy occurs, and then approaching the filling up of that vacancy in a leisurely fashion? If there is a talent crunch, as is being increasingly mentioned, will it not be worth our while to identify not one, but two possible successors for each position, without remaining content that whoever is presently with us, will serve till the date of his/her superannuation?

I am aware that we have a Risk Management Committee (RMC) in place in our company. I would like to be satisfied that the committee is meeting as often as is required, to address the diverse risks that manifest themselves from time to time. Does the RMC have adequate expertise to scan the risk environment, and put in place mitigation measures? Is our company open to inviting external experts, and benefiting from their wisdom, rather than subscribing to the view that the entirety of requisite expertise resides within the company? Some companies have, perhaps for good reasons, focused significantly on cyber security. I hope that is not leading to other risks, which are equally damaging, being ignored.

During the Covid years, for entirely understandable reasons, all companies including ours, had virtual AGMs. Now that Covid, at least in its most virulent form, is behind us, can we look forward to physical meetings or hybrid meetings? I need hardly mention that in the days of yore, AGMs were like annual pilgrimages, where shareholders would religiously turn up, not just to ask questions, but also to interact with the Directors on the sidelines of the meetings. Can ours be among the companies that, without further delay, get back to physical AGMs, with provision being made for virtual participation, for persons who are unable to attend? Virtual AGMs were the fallback option a few years ago. Will we get back to restoring primacy to physical meetings? While on the subject of AGMs, can you persuade all your Directors to attend the AGM?

I have received a copy of the Annual Report on the eve of our forthcoming AGM. It is more voluminous than it has been in the past. There is considerable data packed into the report, leaving the average shareholder like me wondering where to look for information that is relevant to me. I am aware that some of the chapters owe their existence to regulatory prescriptions, and cannot be wished away. Will it be possible to attempt, as a handful of companies have done already, a summary, bringing out in bullet form, the highlights of the report that are most meaningful for the ordinary shareholders?

Mr Chairperson, I have many more questions. However, I recognise that if I raise all of them, I will be keeping you occupied with responding to them, instead of devoting your time to ensuring better performance by my company.

While signing off, may I hope that the issues raised by me will receive your attention.

Yours faithfully,
A retail shareholder

For as long as one can remember, retail shareholders were never in the frame of any discussions on major decisions taken by corporates. On some occasions, there was a stand-off between promoters and significant shareholders, degenerating to the verbal equivalent of trading blows, but retail shareholders did not seem to take cognisance, and reflect on the impact that it would have, not only on the company, but also on their investments in the company. They were sometimes in offhand fashion described as “fill it forget it” investors, meaning that they had filled the forms for obtaining shares, and promptly forgotten about their investments in the companies.

Times have changed. Off and on there have been some measures taken by lawmakers and Regulators to ensure that the legitimate interests of small shareholders were protected. In fact, the Companies Act, 2013 (the Act) even conceived of a Board seat for the representatives of minority shareholders, but this being an optional provision, was ignored across the board. The Act also provided for class action suits, the relevant Section being brought into effect from June, 2016, two years after the Act came into force. There was considerable speculation on when the class action suits would begin to be seen, and what impact, if any, these would have on persons who would choose to desert Board positions at the first sign of any adverse development. The sweeping provisions of Section 245 of the Act, which travelled beyond the corresponding provisions in the US enactment, created some excitement, but when class action suits did not surface for a while, the provision relating thereto was beginning to be seen as a dead letter.

Fast forward to 2024, and two class action suits in high profile corporate entities have suddenly surfaced.

The ICICI Group, which comprises several entities, had over a few years, listed many of them, in order to broad base ownership, and to positively impact on the financials of those entities. These moves by the ICICI Group, and a few other groups, were seen as positive, since the stock market began to witness supply of stocks of entities which hitherto were the unlisted arms of the parent entity.

U-turns are not uncommon in the corporate world. The ICICI Group, after a few years of having ICICI Securities listed, decided that there was merit in delisting that entity, and folding it into the parent entity, ICICI Bank. Not unexpectedly, minority shareholders saw red. They were concerned that due process was not being followed, and that the valuation was incorrect. They also alleged that attempts had been made to influence shareholders to vote in favour of the delisting. According to them, the valuation was incorrect because it did not take into account the bull market run during the relevant period, and the consequent improved position of ICICI Securities. One related concern that was expressed was that the phone calls that were made to the shareholders, persuading them to vote in favour of the merger scheme, came from ICICI Bank, and not from ICICI Securities, giving rise to the apprehension that minority shareholder data had been shared by ICICI Securities with ICICI Bank. Notwithstanding the challenge mounted by minority shareholders, the resolutions were passed with a significant majority, possibly influenced, in part, by positive recommendations by the proxy advisory firms.

The question that ought to be addressed is whether a few years after bringing investors on board by promising them a bright future, an entity should move in the opposite direction, and merge the listed subsidiary with the parent. What happens then to the promises held out to minority shareholders? Should there not be a reasonably long period for companies to remain listed, and if delisting was to be done, should there not be a suitable reward for the shareholders, who stayed invested from the date of listing, till the date of proposed delisting?

What is significant is that a section of minority shareholders chose to oppose the proposed merger. On several occasions in the past, such moves would have gone through, unquestioned by any shareholder, and without needing the positive recommendations of proxy advisory firms. Is this an indication that shareholders are keeping close track of the companies in which they are invested, and applying their minds to the corporate actions that are being taken by the companies in which they are shareholders? They have been known to do so in the past in matters related to executive compensation. If such shareholder activism is beginning to manifest itself, it deserves support by Regulators, commentators and students of corporate governance. Hopefully, even proxy advisory firms should, while seeing merit in the economics of the merger, ask some questions on why the delisting is taking place, not long after the listing process.

ICICI Securities is not a case in isolation. Minority shareholders of Jindal Poly Films have initiated a class action suit with the NCLT alleging fraudulent conduct by the company’s promoters and management. They have alleged that the company has incurred wrongful losses of approx. Rs 2500 crores due to the actions of its promoters and directors. One of the defences mounted by Jindal Poly Films goes to the root of the matter. They have challenged the definition of “class” in the class action suit, stating that the defined class ought to be homogenous, which, in their view, it was not in the instant case. They have referred to the fact that individual shareholders, with varied circumstances, have come together, and it does not meet the criteria of homogeneity. This is a bit of a stretch. It should be adequate if the shareholders, even with admittedly varied circumstances, come together to challenge one or more actions of the management and the promoters. The commonality of being shareholders should itself establish the homogeneity required for 100 or more shareholders to make common cause, and to take the corporate to the appropriate legal forum.

Shareholder groups are also raising concerns on the corporate goals and objectives of some large companies. Earlier this month, a coalition of shareholders in a European company, Nestle, the world’s largest food manufacturer, brought up a proposal stating that the ratio of healthy foods that the company offers to consumers should be increased. This concern was voted on at the company’s AGM. Share Action, the activist NGO that put forward the resolution, was concerned that the company was excessively reliant on products high in fat, sugar and salt, and should move to offering healthier eating options. The concern was shared by leading public health experts in the Continent as well as by some significant institutional investors. Not surprisingly, the resolution did not go through. Sometime last year, the company had published a new nutrition target to sell more nutritious products by 2030, but it did not meet investor expectation for improving public health. The company sought to downplay the concern stating inter alia “that people can enjoy indulgent products in moderation, and there is nothing wrong with that.” The company further stated that if they were to set targets to increase the proportion of sales from the more nutritious segment, this would require the company “to weaken other parts of our portfolio, creating opportunities for competitors, without yielding public health benefits”. While food experts might quarrel on what is healthy and what is tasty (and rarely the twain do meet), what gives corporate governance protagonists some hope is the fact that even the portfolio of products of a food manufacturer is attracting attention of minority shareholders and activists. Corporates need to watch out for similar adverse campaigns in regard to all of what they do, and the manner in which they go about their work, since shareholders have now begun to stand up and ask inconvenient questions.

At one end of the spectrum, Regulators are putting in place newer provisions to safeguard the interests of minority shareholders and other stakeholders. At the other end of the spectrum are companies that mount clever defences to explain what, prima facie, does not pass the smell test. Caught in the middle are proxy advisory firms, who cannot routinely oppose all proposals of management, but must see whether there is public good residing in the proposals that representative groups of minority shareholders articulate based on their observations and research. In this context, it is worthwhile to take note of some of the proposed changes to voting guidelines that one proxy advisory firm has put out for public consultation. On the subject of RPTs, they have indicated that some additional practices need to be followed by companies if the firm has to support their resolutions. It is useful to step back and wonder  why RPTs are attracting a lot of flak. Firstly, neither law nor regulations, bar RPTs. Only guardrails such as the transaction being in the ordinary course of business, and at arms length, have been provided, so as to ensure that the promoters or the majority shareholders do not benefit from any conflict of interest in such transactions. However, providing a large number of procedural requirements tends to give the impression that companies would be well advised to avoid all RPTs, thus causing harm to themselves. The tendency of putting in place more procedural and substantive prescriptions, without perhaps determining whether there is any public interest that is served, needs to be given up.

In the case of remuneration, there is an overarching recommendation to cap it in absolute amounts. When it comes to Employee Stock Option Plans (ESOPs), the firm has stated that it will consider recommending voting against all remuneration related resolutions that do not disclose the expected level of stock options to be granted to the directors. Further, it has raised the question whether giving 75% or more of ESOPs to persons below senior management is a good practice. How such distribution will incentivise the senior persons, who admittedly have a higher responsibility to lead the company, is completely unclear. ESOPs being taken as a part of the fixed element of compensation, and predicting their future value, are needless complications. Isn’t this a matter in which companies and Nomination and Remuneration Committees should be trusted to do the right things, and shareholders should be encouraged to ask questions if something seems odd? Is ESOP a tool to reward and retain the better performers, or is it an instrument to reduce economic inequalities?

If the number of situations in which the proxy advisory firms recommend voting against resolutions significantly increases, it will be difficult for companies, going forward, to transact business in a competitive environment, by disclosing information, that has the elements of business confidentiality.

Every additional recommendation or practice that keeps companies on the straight and narrow path is prima facie welcome. However, in the process, we should not end up, promoting shareholder adventurism masquerading as shareholder activism.

PS: Even as this newsletter was being put to bed, came the welcome news of a SEBI order, based on investor complaints, directing NSE to go into the allegations of improper RPTs in Linde India. The theatre of battle is no longer limited to AGMs and EGMs. It can extend to regulatory fora as well. Investors who wrote out cheques, are finally asking for checks.

It finally happened. After close to 12 years, my tenure as an Independent Director (ID) on the Board of one of India’s largest companies came to an end on March 31, 2024. 5 days earlier, on the day of my last meeting as a Director on this Board, I took out some time (not during the meeting) to reflect on the years gone by, the richness of the experience, the lessons learnt, the lessons that ought to have been learnt but were not, and the interesting persons one met on the journey. And, not to forget, some aspects of Corporate Governance.

Boards vary from company to company. The quality of the Board is not determined by the numbers on its financial statements, or the domain in which the company exists. Much of what goes into the collective entity that is called the Board of Directors, is influenced by its members, the complexity of the businesses, the geographical spread in which the company operates, and several other variables. What often does not get adequate attention is the culture of the company, which serves as a differentiator between Boards and Boards.

The size of the Board is a good starting point. This company, on whose Board I was privileged to serve, had, not so long ago, 22 members on its Board. When it was mentioned to the then-Chairman that we could field 2 cricket teams of Directors, and would be lacking only in substitutes, he mentioned that this was a strong company, with strong persons, and will not need substitutes on account of illness or injury. Looking back at the years gone by, I believe that he was spot on. It took much more than illness or injury to keep persons in this company away from their workplaces, no matter what the inconvenience. The culture of being a part of a large diverse company, present across a wide spectrum of businesses and companies, was more than enough to motivate the average person to join, and to stay on. This was evidenced during the presentations that the officers one or two levels below the Board made at the quarterly accounts’ meetings and the strategy meetings. It was a practice in the company that any new person appearing before the Board to make a presentation would have to introduce himself/ herself before taking the Directors through the presentation. What stood out for me and my colleagues on the Board was that almost every person started his/her introduction by saying that he/she joined as a junior engineer trainee, and was privileged to work for this great company. Some of the younger looking persons claimed to have worked for more than 30 years. It is not clear whether this was on account of their youthfulness, derived from being happy at the workplace, or whether the hair dye applied had the misleading effect of knocking off at least one decade of their age.

But we are digressing. Is a numerically large Board often dysfunctional? Does every ID get enough airtime to share his/her views? Is a two-tier Board the solution to -address the Board-level aspirations of the senior executives?

Many companies that are unsure of themselves give disproportionate importance and attention to the IDs, presumably because they do not wish to be challenged when they are on unsure grounds. Nothing of that kind existed in this company. While intelligent and constructive inputs from the IDs were accepted, and often acted upon, there was no patience with irrelevant conversation or crosstalk. The company saw the IDs as mature persons, able and willing to contribute to the discussions, but what remained unstated was that “no matter how experienced or intelligent you are, you will never measure up in terms of your understanding of this company, or the domains in which it operates”. This was positive professional pride, manifesting itself at every conceivable opportunity. The questions remains, from a Corporate Governance standpoint, whether more could have been got out of the IDs by engaging with them more often, and enabling information flow equally to all IDs to address the perception that some IDs, not all, knew what was happening. Information asymmetry among IDs is never desirable. In this company, the IDs created a Whatsapp group, which served as a clearing house for thoughts and ideas.

There were also some things that went on unnoticed, by the IDs. In one conversation, the then-Chairman of the Board was asked what the company did by way of succession planning at one or two levels below the Board. Succession planning was a touchy topic because in spite of his extraordinary knowledge and contribution to the growth of the company and its business, there was a feeling that he had stayed too long, and a banyan tree effect was kicking in. Perhaps anticipating this unstated thought, he called one of his many young Man-Fridays, and asked him to produce a paper containing details of succession planning. In all the years that I have been with companies, and interacted with the HR function, I did not get to see a paper so thoroughly prepared, anticipating every contingency, and reflecting a state of perpetual readiness, to fill any vacancy that would arise. What is more, even as he was explaining the various facets of succession planning, and the 7 levels of training programmes to equip persons for their role, he did not have to consult the paper that he had called for. Initially, it was felt that this was an individual trait of someone whose name in the public mind was synonymous with the company. In a short while it was seen that his successor had much the same skillset, and knew who ought to be moved where, at what point of time, to maximise the output of the company. The culture of the company had clearly permeated to various levels. And yet, the questions remained whether information on succession planning should have been shared with the NRC, and the Board, proactively, rather than when asked for. This also points to the need for NRCs to be more proactive.

Meticulous attention to detail, and a state of eternal preparedness, set apart this company from several others. In close to 12 years on the Board, I did not see more than one occasion where there was a mistake in the presentation, or in the written text circulated to the Board. Compliance with the procedural aspects of Board meetings was also at a high level, and anyone who, with a sense of bravado, questioned any procedural aspect, was quickly shown the Rule, and then his place.

Lunch was another interesting differentiator. While several courses were served, there was a sense of urgency in getting through with this agenda item, and moving to the boardroom to resume discussions. It was sometimes felt that the pace at which lunch was consumed, with small talk between small bites, was not what the doctor would have ordered for promoting proper digestion. Separately, should Boards that are under time pressure, not opt for working lunches served in the boardrooms? One positive outcome could be that while focussing on toplines and bottomlines, Directors do not do harm to their mid-lines.

Minutes writing was another area in which the company scored very high. Both the past and the present Company Secretaries produced near perfect minutes of meetings. In my recollection, it was only once or twice that there was some discussions in the manner in which the minutes had captured the relevant portions of discussions.

During my tenure on the Board, I was a member of the Audit Committee (AC), and of no other committee. This was presumably because I was asked to Chair 2 Independent Companies (ICs), which were responsible for two businesses. Membership of committees, however, was more or less evenly distributed between IDs. As a member of the AC, I felt early on that the agenda was bloated because of too much attention to transactional details, possibly losing out on issues of systemic importance on some occasions. Over the years, the correction has taken place, and mostly transactions, that are indicative of systemic issues, make their way to the AC agenda. At one point of time, the committee met more than 12 times during a FY. Over the years, it has come down to a more sane level of 6-7 meetings. One peculiar issue, which was corrected some years ago, was that the same statutory auditors had done statutory audit for 50 years on the trot. Now the prescriptive arrangements in the Companies Act, 2013 and the LODR Regulations have been absorbed, and are being practiced. This is also one of the few companies where the internal audit issues get adequate attention, and the cost auditor also is given enough time to present his report, and to engage with the members of the committee.

What I missed most was the opportunity of being provided training/ familiarisation, which some companies provide for IDs on an annual basis. Presumably, given the vast number of businesses and their complexity, as also the mature men and women that make their way to this Board, it was felt that the Directors would look after themselves when it came to familiarisation and training. No harm would be done if twice a year, an outside expert is invited to share some thoughts on the economy, the global situation, and the like.

There is one ritual that should not be lost sight of, especially when I have been through it recently. Every departing Director is spoken of fondly by the Chairperson, and then in addition to the usual memento, is given a box of sugar-free sweets. No amount of telling the past or the present leadership that no sweet is sugar-free, has made any impact on this very sweet gesture by the company.

When Directors depart, it is usual to say good things at their last meeting. Every such occasion reminds me of a former senior colleague of mine, on whose superannuation day, persons that were not well disposed to him, heaped encomiums on him. In his response he said that if he had known that such good things would be said on the day he left, he would have left much earlier.  In this company, the thoughts expressed were genuine, and not over the top.

All good things must come to an end. But while it lasted, one felt privileged to be on the Board of a company that made, and continues to make, the things which make India proud.

In case you missed our 4th Annual Survey on Corporate Governance, please click here.

One of the sharpest exchanges reported in economic history was between Ricardo and Malthus. When Ricardo mocked Malthus’ economic thought, and referred to it as the philosophy of poverty, Malthus shot back by saying that Ricardo’s thoughts reflected the poverty of his philosophy.

Regulatory philosophy of organisations, as well as those that lead them, often influences conduct and behaviour in the regulated universe. In the context of action taken regarding a big player in the financial system, Uday Kotak is reported to have observed that Regulators should not be too conservative and cautious, but should respond fast to accidents in the financial sector. He added that a zero accident policy was dangerous.

With a number of high-profile cases inviting regulatory attention, it is useful to ask ourselves whether regulation should be strict or lenient. In other words, will “light touch regulation” be adequate for transgressions in the financial sector? Is a slap on the wrist sufficient disincentive or deterrent for those inclined to take liberties with laws and regulations? At the other end of the spectrum, should a large number of activities lend themselves to criminal action in the case of abuse, misuse or omissions?

The philosophy of regulation is a material determinant influencing whether business can be carried out smoothly, or will be subject to repeated disruptive interventions by the persons blowing the whistle. Will the absence of strict regulation be interpreted as the Regulator turning a blind eye to misconduct that has systemic implications?

For years, the central questions was whether regulations should be rule-based or principles-based. Those that were directly dealing with compliance matters felt that rule-based regulation was easier to understand and implement, and did not leave room for interpretation. On the other hand, persons at the highest levels in the organisation sought comfort in the nebulous arrangement called “principles-based regulation”. It was their concerned view that if strict rules were in place, we could end up throwing out the baby with the bathwater, and dealing a death blow to entities that had resorted to minor transgressions. Taxation laws, all over the world, are subject to strict interpretation, leaving little room for discretion in decision-making. Will a similar approach in financial sector regulations lead to extinguishing initiative, and obstructing the smooth conduct of business?

Administrative law contemplates the exercise of discretionary powers. However, they are subject to guidelines to prevent uneven treatment of similar cases, and to curb irrational decision-making, unconnected with the specifics of the situation. Is it worthwhile importing into financial sector regulations, the exercise of discretionary powers, with guardrails and guidelines?

Should regulation aim for dealing with a large number of instances of misconduct or should it focus on cases with systemic implications? Securities regulations contemplate a settlement or consent system in which the relatively minor cases are settled by discussions with the alleged offenders, resulting in the payment of an agreed amount as settlement consideration, but not as a penalty, since settlement proceedings do not contemplate a plea of guilty or not guilty. This approach has made it easier for those in charge of enforcement in regulatory organisations to focus on cases with systemic implications, so that an effective message is sent out to the regulated universe that misconduct will not be tolerated. This approach also leads to faster determination of the more significant cases.

Regulators who decide to deal with almost every case that falls within their ambit, run the risk of biting more than they can chew. Often times, it is impossible to even think of dealing with all matters that prima facie need to be looked into. The surveillance system at the securities Regulator’s office throws up, every minute, a large number of suspicious movements in market prices. Would it be the correct regulatory philosophy to go into each of these, recognising that there are bandwidth issues in terms of number and skillsets in most regulatory organisations?

Should regulatory philosophy be conditioned by the right temperament, that in a non-disruptive manner, brings order to the regulated universe? Is there a requirement of assessing what the fallout of the outcome of regulatory action might be, before setting forth on writing orders of indictment?

A study of the regulatory ecosystem might be in order to get a better understanding of how regulatory philosophy impacts the conduct of business. In the securities market, the Stock Exchanges are the first level Regulators when it comes to listed entities. SEBI, which is viewed as the securities markets Regulator, is positioned above the Stock Exchanges. As far as mutual funds are concerned, the Trustees are the first level Regulators. It is for the first level Regulators to look at breaches and misconduct, and to take appropriate actions. In the case of Stock Exchanges, there is a fundamental problem that needs to be resolved. Stock Exchanges are business entities that have a focus on their own toplines and bottomlines. Would it be realistic to expect such entities to suspend companies that are listed on them, and in the process suffer a revenue loss? Is the Chinese Wall separating the business function and the regulatory function a myth or a reality? History has shown that Stock Exchanges very rarely initiate action against listed entities, especially the bigger entities, fearing revenue loss. As for the Trustees of mutual funds, their domain knowledge, and their ability to constructively challenge the functionaries of the Asset Management Companies, is in serious doubt. Therefore, even with two first level Regulators, the securities market Regulator often has to look at the totality of non-compliance in their regulatory domain. The RBI has a different problem. When it comes to public sector banks, the RBI has been known to take the position that these being majority Government owned, the RBI is handicapped in carrying out some aspects of its regulatory function. As far as cooperative banks are concerned, the RBI has often claimed that a dual regulatory system can be exploited by the regulated entities. Both these explanations do not seem to hold water. As far as public sector banks are concerned, the Government, as the majority shareholder, cannot get in the way of regulatory action taken by the RBI under the Banking Regulation Act or any other statute falling within RBI’s remit. As far as cooperative banks are concerned, the State Government/ Registrar of Cooperative Societies is the entity Regulator, and the RBI is the function Regulator that should look at how banking business is being conducted. Here again, there is adequate room for the RBI to enforce its directions, and in the event of non-compliance, nothing would prevent the RBI from suspending the business of the cooperative bank, even if such action seems to be disruptive. What is most important is for Regulators at these multiple levels to share the philosophy of quick and effective enforcement, while allowing  the business to be carried on with minimal disruption.

At the end of the day, do regulatory organisations exist to punish or to reform? Which is the philosophy that best serves public interest in the long run by ensuring orderly conduct in the regulated universe in a non-disruptive manner?

Read our Chairperson, Mr. M. Damodaran’s views on the Supreme Court judgment on the Adani matter here.