Tehelka - The People's Paper

Management =91best practices=92 are = imperative not=20 only for business purposes, but also to build = investor=20 confidence and fight poverty, writes = Shantanu=20 Dey

The=20 increasing focus on corporate governance = is=20 undoubtedly due to the significance of the =
private sector in global economies and = = societies
Governance=20 wasn=92t a term used in corporate parlance so = rampantly=20 till recently, when it=92s become commonplace to = bandy=20 =91corporate governance=92 as so much of smart = jargon. In an=20 address to the International Corporate = Governance=20 Network on July 6, 2006 at Washington DC, World = Bank=20 President Paul Wolfowitz said that all issues of = governance surrounding the private sector are of = crucial=20 importance for business, as well as in the fight = against=20 poverty.

The=20 last few weeks have shown just the kind of = growing=20 consciousness about corporate governance = that=92s now=20 common in India. Early this week, when the = Securities=20 and Exchange Board of India (SEBI) mandated that = all=20 those trading in the cash segment of the stock = markets=20 must have permanent account number cards issued = by the=20 income tax department, the bse Sensex lost 368 = points on=20 September 11, the biggest fall since July 17. = Prem Chand=20 Gupta, Union minister of company affairs, = launched the=20 =91Investor Helpline=92 on September 8, 2006, a = website=20 developed by the Midas Touch Investors = Association and=20 fully funded under the Investor Education and = Protection=20 Fund (IEPF) of the ministry.

Interestingly, while all this was = happening, a=20 report titled =91Doing Business 2007=92 by the = International=20 Finance Corporation (IFC), an arm of the World = Bank=20 appeared, saying that India was one of the most=20 difficult countries to do business. Amongst 175=20 countries, India was ranked 134. During 2005-06, = it was=20 a bit easier to do business in India due to = easier=20 registration, cross-border trading and tax = payment=20 norms. Flow of credit and investor protection = also=20 facilitated business.

According to a corporate governance = assessment by=20 the World Bank-imf in 2004, =93since 2000, a = series of=20 legal and regulatory reforms have transformed = the Indian=20 corporate governance framework and improved the = level of=20 responsibility/ accountability of insiders, = fairness in=20 the treatment of minority shareholders and = stakeholders,=20 board practices and transparency. In particular, = the=20 securities regulator introduced a corporate = governance=20 clause in the listing agreement that clarified = many=20 issues.=94

Gupta asserts that corporate governance = has been=20 high on the agenda of the UPA government. The = MCA-21=20 project has put all business processes of the = registrar=20 of companies on the e-governance mode. It=92s = now being=20 implemented throughout the country. The project = has=20 already started at Coimbatore since February 18, = 2006.=20 The just-launched IEPF portal will deal with = investor=20 grievances presently being handled by the = ministry of=20 company affairs, the Registrar of Companies, = SEBI and=20 the Reserve Bank of India (RBI) in a systematic = and=20 sustained manner.

Even=20 the World Bank president has recognised such=20 initiatives. Wolfowitz said: =93Within = developing=20 countries, governments are also starting to pay = more=20 attention to governance. To attract domestic and = international investors, India has unveiled a = new set of=20 corporate governance reforms early this year for = its=20 public companies.=94

According to Gupta, the government has = taken up=20 the comprehensive revision of the Companies Act, = 1956.=20 The Union company affairs minister explains: = =93Steps have=20 been taken on legislative initiatives, be it the = Competition Act or a new legal framework on the = limited=20 liability partnership.=94 Also, amendments have = been made=20 in the three professional institute acts = governing the=20 practice of chartered accountants, company = secretaries=20 and cost accountants. This is significant at a = time when=20 services are growing, and professionals are = providing=20 diverse services to the corporate sector. After=20 consultations, the draft legislation for the = revised=20 Companies Act is being prepared.

Corporate governance has = become=20 important as private capital becomes, says = Wolfowitz, perhaps the most important = force for=20 development=20 =
Since=20 economic liberalisation, there=92s been a = perceived need=20 for a comprehensive review of the Companies Act, = 1956.=20 There were unsuccessful attempts to replace the = present=20 Act with new laws in 1993 and 1997. Then, a = Companies=20 (Amendment) Bill containing important provisions = relating to corporate governance was introduced = in 2003.=20 But, it was held back anticipating the = comprehensive=20 review.

Even=20 recently, the Companies (Amendment) Bill, 2006 = was=20 introduced in and passed by the Lok Sabha on May = 15,=20 2006, under which no company can appoint or = reappoint=20 any individual as director of the company unless = he has=20 been allotted a Director Identification Number = under=20 Section 266B. This is, typically, the kind of=20 incremental change that experts believe isn=92t = enough to=20 make a serious improvement in corporate=20 governance.

The=20 JJ Irani Committee, which was tasked with making = recommendations for a comprehensive review, has = said in=20 its report submitted in 2005: =93While piecemeal = reform=20 continued through amendments, it has not yet = been=20 possible to bring about comprehensive, new = legislation=20 to replace the existing Act.=94 The Irani = Committee has=20 recommended that =93in the Indian context, it is = important=20 that basic principles guiding the operation of = corporate=20 entities from registration to winding up or = liquidation=20 should be available in a single, comprehensive,=20 Centrally-administered framework.=94

The=20 increasing focus on corporate governance is = undoubtedly=20 due to the significance of the private sector in = global=20 economies and societies. Wolfowitz says: = =93Corporate=20 governance is one essential component of = building a=20 healthy investment climate and boosting investor = confidence. We know that companies with = well-defined=20 shareholder rights, solid control environment, = high=20 levels of transparency and disclosure, and an = empowered=20 board of directors, have no trouble attracting = investors=20 and lenders.=94 The World Bank Group believes = that the=20 surge in capital flows will help developing = countries=20 achieve growth and combat poverty. World Bank=20 prescriptions have often raised eyebrows, but = their=20 argument favouring improved corporate governance = is=20 uncontestable.

In=20 today=92s globalised world, the adherence to = global norms=20 of corporate governance is almost incumbent on = countries=20 like India. The linkage between globalisation = and=20 corporate governance was analysed in a 2001 = Harvard=20 Business School study on the Indian software = industry,=20 and in particular, on Infosys, by professors = Tarun=20 Khanna and Krishna Palepu. They concluded: = =93Software=20 firms=92, and especially Infosys=92 exposure to = global=20 product markets, first, and then to global = talent=20 markets, seems to have driven some adoption of=20 shareholder-style corporate governance in = India.=94 Their=20 work showed that economically interlinked = countries=20 often had similar rules governing corporate = governance,=20 but when it came to implementation, it wasn=92t = so easy to=20 achieve uniformity.

Significantly, amidst all this talk of = corporate=20 governance, the financial performance of the = Indian=20 corporate sector has markedly improved during = the period=20 2003-04 to 2005-06. According to the RBI=92s = annual=20 report, gross profits growth outpaced sales = growth=20 implying profit margins of corporates improved = during=20 2001-02 to 2005-06. Higher profitability was = attributed=20 to higher economic activity and declining debt=20 servicing. Strong corporate balance sheets are = expected=20 to have a salutary effect on private investment. = Also,=20 this will allow Indian corporates to match a = stiffer=20 competitive climate, and also increase their = capacity to=20 acquire companies globally.

But,=20 issues of corporate governance like financial = reporting=20 that=92s become critical for shareholders, = creditors and=20 regulators have to be addressed. In India, 29 = accounting=20 standards have been notified, which will help = bring in=20 greater transparency and disclosures in the = corporate=20 sector and also make their workings compatible = with=20 international norms.

Issues of corporate governance have = become=20 important, as Wolfowitz said, =93at a time when = private=20 capital is becoming perhaps the most important = force for=20 development.=94 In a sobering reflection, the = World Bank=20 chief explained that the basic structure for = developing=20 countries has changed in the last 20 years. = =93For every=20 dollar of official development assistance to = developing=20 countries, there is now more than $4 in border = private=20 investment from rich to poor countries.=94 Most=20 significantly, Wolfowitz made these parting = remarks: =93We=20 can=92t afford to have 1.2 billion people left = behind in=20 extreme poverty. Getting better corporate = governance is=20 one way to keep that from happening.=94 =

Developing countries like India will do = well to=20 register that a few policy brushstrokes, however = it-ordained, may help, but will not raise the = bar enough=20 to truly benchmark Indian companies in terms of = global=20 corporate governance standards.




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