In the past ten years, India has faced public governance scandals at some of its largest blue chips. Examples include the Satyam accounting errors of 2009 (which in 2018 resulted in PWC being barred from conducting audits in India for 2 years), the disregard for minority shareholders’ interests we saw at Tata Group in 2016, and the shareholder revolt over related-party transactions at Raymond in 2017. History has shown that each of these scandals has led to attempts at governance reform. However, repeated efforts from authorities to enact more laws have failed to have the desired impacts. Yet still, in October 2017, a specially constituted committee, named after its Chair, Mr Kotak, published over 80 recommendations on how to improve corporate governance standards at Indian companies. In March 2018, SEBI made its determination that most of the recommendations should be transferred in to the listing rules, but should we expect progression?
We consider many of the changes to be a step forward, but recognise that obstacles arising from local context may hinder the intended progress. Most Indian companies are run by their “promoters”, a group of individuals or a family who set up and have effective control of the company. Promoter-run companies account for 45% of the market.
SEBI’s governance changes to listing rules
Better board structure and effectiveness for top 1000 listed entities
- Reduction in the maximum number of listed entity directorships from 10 to 8
- Expanding the eligibility criteria for independent directors
- Enhanced role of the Audit Committee, Nomination and Remuneration Committee and Risk Management Committee.
- Disclosure of expertise/skills of directors
- Separation of CEO and Chair, initially for the top 500
- Quorum for Board meetings
- At least one female independent director at the top 500 listed entities
Improved oversight for all investors
- Top 100 entities to hold AGMs within 5 months after the end of FY 2018-19
- Webcast of AGMs will be compulsory for top 100 entities by market capitalisation
- Shareholder approval (majority of minority) for royalties to related parties exceeding 2% of consolidated turnover
- Disclosures of auditor credentials, audit fee, reasons for resignation of auditors, etc.
- Enhanced disclosure of related-party transactions
- Mandatory disclosure of consolidated quarterly results with effect from FY 2019-20
In November 2017, we travelled to India for the Asian Corporate Governance Association annual conference. Our engagement with regulators and companies allowed us to gain valuable insights into market developments aimed at improving governance standards at Indian companies. We welcomed the growing interest of market participants in issues around market discipline for promoters, protection of minority shareholder rights, and the development of a uniform Investor Stewardship Code.
India does not need more regulation; better enforcement is required.
India has traditionally relied on regulation to promote its corporate governance agenda. However, the ubiquity of the promoter-led model in which it is widely accepted that promoters’ self-interests precede the interests of minority shareholders, has made effective enforcement of corporate governance norms particularly challenging.
In Q1 2018, SEBI proposed creating a new set of rules aimed at improving corporate governance standards. These rules stem directly from the 80 recommendations put forward by the Kotak Committee on Corporate Governance on a wide range of issues from improved board structure and effectiveness to enhanced disclosure of related-party transactions. SEBI also announced revisions to the enforcement framework, including procedures to suspend trading a company’s stock in the event of persistent non-compliance with governance rules.
We view these changes as a step forward but recognise that obstacles arising from local nuances may hinder progress. Not only do promoters have large economic stakes and the voting rights to match, but under Indian law they also bear additional financial liability for the company. This serves to proliferate a reluctance to depart from the ‘by-the-book’ application of stringent regulation in the market as a whole. In our view, however, a rules-based approach alone will not be sufficient to improve company accountability to minority investors. The greatest impact would come from a cultural shift and understanding of the merits of best governance practice by promoters.
Regulation wise fines levied total (cumulative)