2024 Archives - Page 2 of 2 - Excellence Enablers

February 2024

The Budget Speech (2023-24) of the Finance Minister exactly a year ago, contained 2 paragraphs of significant import in the context of promoting the ease of doing business. The relevant paragraphs are reproduced below for reference and recall.

“Financial Sector Regulations

To meet the needs of Amrit Kaal and to facilitate optimum regulation in the financial sector, public consultation, as necessary and feasible, will be brought to the process of regulation-making and issuing subsidiary directions.
To simplify, ease and reduce cost of compliance, financial sector regulators will be requested to carry out a comprehensive review of existing regulations. For this, they will consider suggestions from public and regulated entities. Time limits to decide the applications under various regulations will also be laid down.”

The stated objectives are unquestionable and cannot be quarrelled with. Reduction of complexity and cost constitute major steps to facilitate business activities. However, there are some important aspects that should not be lost sight of.

The Policy of the Ministry of Corporate Affairs (MCA) for pre-legislative consultations and comprehensive review of existing rules and regulations addresses two related problem areas that financial sector regulators are obliged to grapple with. As far as pre-legislative consultation is concerned, it is necessary to not merely go through a well laid down process, but to bring to bear an open mind that is willing to carefully consider the suggestions that are received, and to accept and incorporate them, wherever considered appropriate. This concern is being expressed since it is often heard that even though a detailed consultative process has been gone through, there appears to be no change in the content of the original proposal, prompting the question whether suggestions were received, and if so, whether they were carefully considered. At the same time, many of the critics of the present pattern of consultation should bear in mind that consultation is not concurrence. There is no requirement for every suggestion, major or minor, to be accepted, following a detailed analysis. What can be quarrelled with is clearly the very short time period made available to stakeholders to study the proposals, consider their implications, and to articulate the alternatives that they wish to suggest.

Having taken the trouble to lay down the detailed guidelines, the MCA has gone on to state that the Policy is advisory in nature, and should not be construed as a policy directive. This position has been taken since there are specific statutory provisions in some statutes on the manner of consultation. It would be useful to reconcile the differences, if any, and to formulate one common policy for consultations, without diluting its force, by stating that it is mandatory in nature.

The second aspect which the Policy paper addresses is the need for a comprehensive review of existing regulations. This is an area in which it is not necessary to reinvent the wheel. The RBI had several years ago put in place a regulatory review mechanism, by constituting a Regulatory Review Authority, which would look at existing regulations, retain what is relevant, restate what needs to be refined, and retire the irrelevant regulations. Separately, Excellence Enablers has for years been articulating the need for every authority that writes out regulations, to examine the stock element, and to weed out all regulations guidelines and the like that are past their sell by date. To ensure that this is done on an ongoing basis, the possibility of introducing sunset clauses, so as to compel a review, had also been suggested. This is an area where the prescription is available, and only the treatment needs to be commenced. What could be more value-adding in a consultative process is to state clearly the present position, the need for change, the manner and extent of change, and the alternatives that could be considered. It is equally important to give adequate time for the consultees to express their views. This could lead to lesser regulations, that are better crafted, and are easy to understand and comply with. The avoidable adversarial nature of the relationship between the Regulator and the regulated should not influence the process of consultation. This alone will give rise to regulations that are pragmatic and practicable.

Consistent with the announcement in the Union Budget for FY 23-24, SEBI has floated a consultation paper to harmonise the provisions of ICDR and LODR Regulations, with a view to facilitating the ease of doing business. SEBI’s consultation paper contains the recommendations of a 21-member Expert Committee, that was constituted to make appropriate recommendations. At first sight, it would seem that the Expert Committee should have had more representation from promoters and senior management, and a few well informed and experienced Independent Directors (IDs). The Expert Committee has stated in its report that while the process of deliberating on the suggestions received, and finalising its recommendations, is ongoing, some recommendations pertaining to the ease of doing business under LODR and ICDR Regulations have been set out in the Report. One wonders whether this is the right approach considering that some of the other regulations that the Expert Committee is presently looking at would have to be harmoniously constructed with the LODR and the ICDR.

The number of interim recommendations will by themselves merit a very detailed paper. Therefore, for our present purpose, some of the issues given rise to by some interim recommendations are proposed to be addressed.

The first set of recommendations relates to applicability of regulations on the basis of market capitalisation. The problem sought to be addressed is the treatment to be accorded to companies which fall below the applicability threshold, and then cross the applicability threshold. Without getting into avoidable details, it would be better to state simply that when a company falls below the applicability threshold, the provisions shall cease to be applicable until such time as the company reaches a position above the applicability threshold. A period of 3 months could be prescribed to determine eligibility.

The next recommendation relates to the limit of membership and chairmanship of committees for a Director. The suggestion is that while operationalising the limit for the maximum number of committee positions, the Stakeholders Relationship Committee (SRC) should be excluded, and only the Audit Committee (AC) should be included. The Expert Committee seems to be of the view that in order not to breach the limits laid down, IDs prefer not to take up membership of the SRC. It would appear that the membership of a committee is by choice, and not by a considered decision of the Nomination and Remuneration Committee (NRC)/ Board, after taking into account the experience and the aptitude of the members concerned. The Expert Committee should have proceeded in the opposite direction, and stated that membership of the NRC and the Risk Management Committee (RMC), a non-statutory committee mandated by SEBI, should be taken into account, having regard to the increased importance of these committees, and the consequent time commitments that members of these committees will have to make. The underlying logic seems to be that there would not be enough persons to take up Board positions when a big churn takes place a few months from now. To put it mildly, this perceived supply constraint of candidates is an imaginary problem created by the unwillingness of Boards and managements to look beyond familiar territories and comfort zones while scouting for worthwhile candidates. This recommendation by the Expert Committee should be junked. What is immediately necessary is to reduce the number of directorships to a maximum of 5 in listed entities, and to ensure that each such Director is a member of at least 2 committees of the Board. Omitting certain categories of companies, and limiting the regulatory maximum to only equity listed entities, is a move in the wrong direction.

The timeline for filling up vacancies of KMPs has also led to a questionable recommendation. The Expert Committee has recommended that the time limit for filling up of the vacancy should be increased from 3 months, to a maximum of 6 months, in cases involving approvals of regulatory, Government or statutory authorities. Firstly, except in a few sectors, that have security implications, approvals of statutory authorities should be dispensed with. Further, the need for approval of the Regulators or the Government is inconsistent with the role and responsibilities of the Board, which should alone be tasked to identify and appoint KMPs. Prior clearance by Regulators or Government authorities translates to micro management, and disempowers the Board from discharging one of its primary responsibilities, which is to select the right persons as KMPs. What superior wisdom Regulators or Governments can bring to bear on the process is not at all clear.

The gap between meetings of the RMC is presently 180 days. It has been recommended that this gap should be increased to 210 days. This is also a step in the wrong direction. Considering that the number, nature and dimensions of risks have considerably expanded in recent times, the RMC should be required to meet at least 4 times in a year. Resultantly, this counterproductive proposal to increase the maximum gap between the meetings of RMCs should be abandoned.

Yet another consultation paper which has been around for a while is the one detailing the proposals to amend SEBI Regulations with respect to verification of market rumours. This paper, and subsequent observations by the NFRA, have led to Boards and managements grappling with the problem of defining materiality in the context of the reporting requirements. There is no clarity yet on how materiality is to be defined. At the same time, putting in place the right structure to ensure reporting of rumours that have a bearing on share prices is also a continuing challenge. Mercifully, SEBI has postponed the last date for giving effect to these proposals. In a lighter vain, corporates have been heard to ask whether the postponement is a fact or a rumour that they need to deal with.

There have also been increasing noises on the setting up of Self Regulatory Organisations (SROs). While it is fashionable to talk in terms of setting up SROs, it is necessary to ask the question whether the existing SROs have been discharging their responsibilities adequately. There are regulatory bodies comprising professional members of industry or trade bodies, with the business versus regulation conflict not being adequately addressed. In most of these organisations, the committee that has been seen to underperform is the Disciplinary Committee, which flies the flag of self regulation. Whether we should act in haste by setting up SROs, only to repent at leisure, is a thought that should worry the policymakers, having regard to the experience across sectors and professions.

As this newsletter was being put to bed, came SEBI’s addendum to the consultation paper recommending that “the provision of 1% security deposit in public/ rights issue of equity shares, as prescribed under the ICDR Regulations” should be done away with. Can it be hoped that such recommendations are not put out, in driblets, for comments?

The facilitation of the ease of doing business is an objective which has universal endorsement. It is however necessary to ensure that the instrumentalities and procedures being put in place to facilitate the ease of doing business do not in themselves become obstacles or hurdles in the process. “Less regulations, more regulation” is what we should be looking for”.

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

January 2024

It is that time of the year when we look back at the year gone by to see whether things could have been different, had governance practices been strictly adhered to. 2023 had so many failures on the Corporate Governance front that many a crime reporter could have been salivating at the possibility that he/she could get a change in assignment. The year had its share of family feuds as well as stand offs between persons who had come together to set up business, and then drifted apart.

Nothing could have been more unseemly than the washing of dirty linen in public by a high profile husband wife duo. The Chairman and Managing Director of Raymonds, and his better half, both Directors on the Board, traded accusations, raising questions on whether this acrimony could affect the stability of operations of the listed entity. Prompted by a suggestion by an advisory firm, Independent Directors (IDs) got into the act, and sought advice from a legal expert on what, if anything, they should be doing, to protect the interests of the company. Would they not have been better off suggesting to both the protagonists to step down from the Board in order to address the interests and concerns of other stakeholders? The image of the “Complete Man” took a complete beating.

In another high-profile dispute, a brother and sister are ranged against each other for the control of Hikal, a group company of the Kalyani Group. With around a week left for the year to come to a close, the sister succeeded in ensuring that the brother did not get re-elected to the Board. Would this bring down the curtain on yet another family dispute, or is it the appetiser, with the main course to follow?

The Kirloskar Group saw a continuing standoff among the siblings. There were allegations of insider trading, but SEBI saw no merit in them. A provision exists for arbitration to settle disputes, but it does not seem to have been availed of.

IDs had their moments in the Sun. In the case of Dhanlaxmi Bank, one ID quit citing multiple issues, including lack of support from the Board, and alleging inter alia that the bank’s business was not conducted in an ethical manner. The other Directors did not seem to agree, with the result that the complainant Director had to resign. It might have helped if the management shared its perspective on these issues.

Modulex Construction Technologies created a record of its own, with one ID resigning after writing a 65 page letter, containing various allegations. Around the same time, the auditor also resigned. The curious explanation trotted out was that the ID’s complaint had led to a lot of compliance requirements, which hampered other work. Clearly, in the pecking order, competing for the company’s attention, governance seemed to be bringing up the rear.

PTC India Financial Services was a unique case in which IDs got together and flexed their collective muscle (in 2022) to ensure that governance practices were put in place. Happily, SEBI, RBI and MCA saw it fit to endorse the stand taken by the IDs, and brush aside the somewhat feeble defence put up by the management. Hopefully, this will send a signal to other entities, especially public sector undertakings (PSUs), that the power that resides with the majority shareholder and its agents cannot be exercised by turning a blind eye to improper practices.

Atlas Jewellery had a different set of issues. The auditors questioned Corporate Governance structures and practices, and pointed out that there was an imbalanced Board, and no Audit Committee in existence. With such basic deficiencies, one wonders whether companies of this kind ought to be in the listed space. Clearly, all that glitters is not gold.

One standoff, which is still playing out, is the proposed acquisition of a controlling stake in Religare Enterprises by the Burmans of the Dabur Group. The IDs of the target company have complained to the Regulators against the Burmans, also alleging inter alia that they had colluded with the former promoters of the company. At the same time, questions have been raised by the Burmans on the issue and quantum of stock options to the Chairperson of Religare Enterprises.

There were several other shocks in store. Tata Consultancy Services had to deal with an ongoing “bribes for jobs” scam, involving the taking of bribes from staffing firms by the senior executives of the company, in order to provide jobs to candidates of the staffing firms. Following an internal investigation, the company sacked 16 employees. Clearly, a malpractice of this kind must have been going on for a while, and it is passing strange that with the checks and balances, especially in IT companies, this scam remined under the radar for as long as it did.

Dish TV presents an interesting saga, where the ongoing developments are more riveting than the developments in the serials that they stream. The latest development, following several months of standoff, is that the shareholders have voted out all the IDs, leaving the company with a truncated Board, numerically inadequate to provide leadership. Separately, Zee Entertainment, a sister company, has seen 2 of its IDs voted out, while a third has resigned, leading to delay in the company’s merger agreement with Sony.

2022 had seen the first case of a rating agency being asked to shut shop by SEBI. Following directions of SAT, SEBI reconsidered the matter and allowed Brickwork Ratings to continue its business, with a number of preconditions and stipulations. It would be worthwhile for a policy to be formulated on how to deal with allegedly errant service providers, which have a significant role to play in the ecosystem, so that regulatory fiats are not disruptive, and do not go against the interests of the stakeholders.

Finolex Cables brought to the fore, some of the underlying weaknesses of the dispute resolution mechanism. There was nothing unusual in the fact that 2 parties contending for control had to go by the wishes of the shareholders who voted at the AGM. The matter was taken to the NCLAT. Meanwhile, an order was passed by the Supreme Court stating that the results of the voting at the AGM should be declared, and no order should be passed till that was done. Ignoring this directive, a 2-judge bench of the NCLAT passed orders which rightly attracted the adverse notice of the apex Court. With the Supreme Court’s glare on the entire process, the judicial member resigned, and the administrative member tendered an unconditional apology. Whether such an apology ought to have been accepted, is a matter that merits careful consideration.

The state of affairs in some unlisted entities merits comment. The case of GoMechanic indicated to what levels founders could go. One co-founder confessed that there were “grave errors in judgement” and added that the three co-founders got “carried away” and that their passion got the better of them. Stated simply, they cooked their books and got caught out. Any dictionary would have told them that “governance” comes before “growth”.

Bharat Pe and Byju’s are interesting illustrations of the ambitions of the founders leading to the companies going astray. Unbridled growth, without putting adequate controls in place, is sooner than later likely to lead to a grinding halt, bringing grief in its wake. Leaving governance too late, while in pursuit of growth, is clearly not the right formula for success as these 2 founders have discovered to their cost.

PSUs and public sector banks (PSBs) continued to grapple with age old problems that do not seem to be going away anytime soon. In 2023, some PSUs were pulled up for not having an adequate number of IDs or for not having a woman ID on the Board. The explanation that the entities were not responsible for the non-compliance, since the decision-making powers were with the Government, was rightly not accepted by the Regulators. As for PSBs, there have been vacancies in critical positions such as that of the Chairperson, creating an avoidable imbalance in the construct of the Board of Directors.

As if all the negative developments referred to in the preceding paragraphs were not enough, there was the curious case of an admitted short-seller putting out a negative research report on the Adani Group of companies, causing a precipitous fall in the share prices of those companies. SEBI’s role in allegedly turning a blind eye to the developments in the Adani Group came in not only for adverse comments, but also for challenges in the Supreme Court. Consistent with the directive of the Court, SEBI has filed a detailed report, indicating the action taken in 22 out of the 24 matters that needed to be gone into. Short-sellers causing heightened volatility in the market, and benefitting therefrom, is a development that is likely to have its sequel in the coming years.

The foregoing paragraphs contain a small sample of the kind of irregularities and transgressions that seem to be plaguing the corporate sector. As if this was not bad enough, SEBI came in for considerable criticism, with the challenges to its orders being upheld by the SAT. Almost every other day, there have been reports of some high profile case or the other in which SAT has not only set aside SEBI’s orders, but also passed scathing comments, as well as levied penalties in a few cases. SEBI’s woes got further compounded when the Supreme Court, after confirming an order of SAT, setting aside a penalty of Rs 2 lakhs imposed on Tata Steel, remarked that SEBI should not be filing appeals in a routine fashion against every adverse order passed by SAT. As if that observation was not bad enough, the apex Court directed SEBI to file a detailed statement, indicating the cases in which they had gone in appeal to that Court. While on the surface, the Supreme Court’s observations might pass muster, there is another aspect that should not be lost sight of. If, for argument’s sake, SEBI does not file an appeal in the case of an adverse order of SAT, who is to prevent some agency or the other from questioning why an appeal was not filed, and whether the intentions in not filing the appeal were entirely honourable? Safety seems to lie in preferring appeals, even if there is prima facie very little chance of success. The larger, and more important, issue that needs to be addressed is why the quality of orders cannot be improved, so that more of them are sustained in appeal.

SEBI has on a number of occasions argued that in a large majority of cases, the orders are not set aside by the Appellate body. However, with a number of high profile cases attracting adverse notice, the truth that perception is more important than reality seems to hold ground. It is useful to remember that dog bites man is no news, man bites dog is news. In the public mind, a Regulator is not expected to be wrong.

There are several takeaways from the year gone by. Corporates clearly need to get their act together because any violations of law or regulation could attract strict adverse notice. Even if orders passed by the Regulator in the first instance are set aside in appeal, there is every possibility that the reputation of the company would get significantly impacted. It is also useful to remember that the setting aside of orders in some cases does not come as a vindication of the practices by the corporates, but only as cases in which there was insufficiency of proof to lead to an adverse finding.

At the same time, the task of significantly skilling persons responsible for adjudication of disputes should be given high priority. Sometimes, good cases fail because the orders are badly written, and this emboldens the ill-intentioned individuals and entities to cut corners, and to take their chances. The related element of delay should also not be lost sight of. SAT has, on quite a few occasions, commented adversely on the time taken by SEBI to arrive at decisions and pass orders. Strangely, in the recent case of Karvy Broking, SAT itself had reserved orders in February 2023, and passed orders in December 2023. Justice delayed is justice denied, whether at the original level or at the appellate level.

Exchanges, which are the first-level Regulators, also need to act with alacrity. It is useful for them to look at the time taken after a significant development is posted on their websites, to ascertain facts, and more importantly, to follow up on matters where the explanations offered do not hold water.

The Ministry of Corporate Affairs on its part has rightly decriminalised a large number of offences in the Companies Act, 2013, but at the same time has stepped up on enquiring into non-compliances, and levying significant penalties on the defaulting entities.

NFRA, the latest kid on the regulatory block, has demonstrated its seriousness of intent is streamlining the auditing process, to increase its reliability. Conventional wisdom has it that when accounts are audited and opinions expressed, the stakeholders in the ecosystem can place reliance thereon. This position of comfort has been rocked by recent findings, which has found a number of irregularities in the work done by the big 4 auditing firms. Separately, the Regulator has also touched on the concept of network firms in which one entity does the audit, and the other, a closely related entity, provides non-audit services. If a satisfactory solution can be found to this obvious subterfuge, we will step into 2024 with legitimate expectations in place of misplaced hopes.

In a scenario that seemed dismal for most of the year, the RBI stood out as an embodiment of hope, with its exhortations on Corporate Governance, and by making it clear to banks, NBFCs and Directors that governance is a non-negotiable requirement. Clearly, the banking Regulator is deserving of appreciation and applause. It needs to be mentioned that the organisation, led by a history scholar, who the commentariat thought was unsuitable for the role, has earned the plaudits of the global banking community, with the history scholar himself making history as the best central banker during 2023.

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