Companies are owned by shareholders, retail or institutional. In order to ensure that management are transparent with, and accountable to, them, the concept of Corporate Governance has gained increasing currency. While there is no one universal definition of Corporate Governance, the essence of it lies in maximizing the interests of all stakeholders, especially shareholders, and enhancing their value, by following ethical and legal practices in managing a company.
From the 1990s, both in the UK and the USA, focus started shifting to Corporate Governance, with accounting scandals leading to the failure of companies. In 2009, in India, the Satyam scam raised several questions on Corporate Governance practices of listed companies and also brought a sharp focus on the role and accountability of Directors, especially Independent Directors (IDs), and management, the role of the auditors, and the functioning of Boards and Audit Committees.
As a response to the happenings in the corporate world, both the Companies Act, 2013 and SEBI LODR Regulations, 2015 had a number of provisions to ensure that the Board was functioning properly. The committees of the Board were properly constituted and had clear roles. The IDs were held accountable for their actions. Auditors too had their role defined, including in relation to identification and reporting of frauds. The number of disclosures were also increased.
However, in all laws and regulations, there would be some loopholes, which would be exploited by persons with the wrong intent. Time and again, there has been news of some promoter or the other, who decided to benefit himself at the expense of others. One such example is the case of the promoters of Fortis. There have been instances of promoters, who while occupying executive positions, were perpetrating as well as conniving in fraud. Rana Kapoor in Yes Bank is an example. IDs sleeping on the job, with Audit Committees not focusing on financials is also not uncommon. Jet Airways, which went out of operation after a qualification relating to its not being a going concern was raised by the auditor, is a case in point. Auditors have been found to be colluding with management, and that has had disastrous consequences. IL&FS has been in news for this reason. Whistleblower complaints not always being addressed properly can also result in a disaster. The latest to be held accountable for this is Asian Paints. The Board blindly trusting the MD, can result not only in financial issues but also reputational ones. The former MD of ICICI Bank was guilty of it. Founders, not happy with the management, and raising issues relating to the functioning of the company in media, can cause problems. Infosys is an example. Raymond has come under scanner time and again for its Related Party Transactions (RPTs). Processes laid down in law, especially those related to RPTs, not being respected, is frowned over even by the Regulator. Vedanta recently got a warning for this. True independence of an ID is very important for objective decision-making. There are any number of instances when fingers have been legitimately pointed at IDs. No list on boardroom battles can be complete without a reference to the Ratan Tata-Cyrus Mistry boardroom battle, regarding the ouster of Mistry. The list is long.
In addition, shareholder activism, often bordering on adventurism, is also on the rise. Both the Companies Act, 2013 and SEBI LODR Regulations, 2015 have placed a lot of importance on the rights of shareholders. In turn, shareholders, especially institutional investors, have started voicing their concerns on issues relating to appointment, reappointment, remuneration and RPTs. In 2021, a number of companies such as Eicher Motors and Balaji Telefilms saw remuneration-related resolutions not being approved by shareholders. Companies like Vedanta and Lupin faced shareholders’ wrath over the appointment of Directors, and grant of employee stock options (ESOPs), respectively. The ZEE – Invesco fiasco has put the spotlight on Corporate Governance, and the role of a promoter and that of an institutional investor. The role of a lender, who invokes pledged shares, has come under the scanner in the Dish TV – Yes Bank saga.
Asymmetry of information would always be present. Corporate Governance practices in India are meant to reduce, if not eliminate, the misuse of this asymmetry. To curb this, SEBI has been very active is in implementing Prohibition of Insider Trading (PIT) Regulations. SEBI first formulated the SEBI (Insider Trading) Regulations in 1992. Over the years, the Regulations have been amended to provide the definitions of Unpublished Price Sensitive Information (UPSI), insider, designated person, trading window, as also the role of Compliance Officer. In the process, the Regulations have been based on the ‘need to know’ principle. There have been several cases where promoters, employees, and Compliance Officers have been found on the wrong side of Regulations, and strict action has been taken against them. Continuing episodes of non-compliance with this Regulation causes reputational loss for the company and the individual concerned.
Loopholes will be exploited. India has a number of laws and regulations. What is required is stronger implementation so that individuals and companies desist from exploiting any such loopholes.