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Don't Derail Corporate Governance Reforms by Creating Turf Row

OCTOBER 27, 2017

By TIOL Edit Team

THE report of Committee on Corporate Governance (CCG) merits serious attention against the backdrop of corporate frauds reflected in loan defaults, tax evasion, money laundering and dubious corporate lobbying.

Appointed by Securities and Exchange Board of India (SEBI), CCG submitted its report earlier this month under the chairmanship of Uday Kotak, CEO Kotak Mahindra Bank.

CCG has covered a vast terrain of corporate affairs. It has largely recommended plugging gaps in existing regulations, tweaking certain others, apart from proposing new initiatives.

A new initiative that falls on the lap of the Finance Ministry moots consolidation of Government stake in listed public sector enterprises (PSEs) into a holding company to insulate them from ministerial interference and to avoid conflict between ownership and regulatory issues.

On a few ticklish ones, it has recommended a phased shift. The public comments and views of other stakeholders should help articulate CCG's recommendations.

A case in point is splitting the post of Chairman and Managing Director. CCG has recommended that listed entities with more than 40% public shareholding should separate the roles of Chairperson and MD/CEO with effect from April 1, 2020.

It suggests that after 2020, SEBI may examine extending this arrangement to all listed entities with effect from April 1, 2022.

It is unfortunate that Ministry of Corporate Affairs (MCA) has tried to pour cold water on CCG's reforms recipe by invoking ease of doing business & breach of regulatory turf.

Before elaborating MCA's concerns, it would be better to consider a few more recommendations. These suggestions should be acted upon by companies without waiting for nudge from SEBI.

An instance in point is a simple recommendation that calls upon companies to submit disclosures to stock exchanges in formats that can be searched with key words. Many companies frustrate investors and analysts by submitted poorly scanned documents that do not have functional search options. This makes search for relevant information in documents time-consuming and tedious.

Similarly, one can only welcome CCG recommendation that the stock exchanges should collectively harmonize the formats of the disclosures made by the listed entities on their respective websites no later than April 1, 2018.

Another suggestion that can't be faulted with moots disclosure of certain major financial ratios in the annual report. The disclosure, along with detailed explanation, should be made when there 25% or more change in the ratios. These include inventory turnover, interest coverage ratio, operating profit margin and net profit margin.

This contention applies equally well to the recommendation that would require listed companies to disclose their medium and long-term strategies to investors.

Unfortunately, all such innocuous and non-controversial proposals, have invited a terse "no comments" from MCA. Such stance's inter-regulatory confabulations ought to be avoided. All regulatory entities and their representatives should cooperate wholeheartedly to resolve economic and business issues.

In a letter dated 3rd October 2017 to CCG, MCA has stated that many of its recommendations are contrary to the Government's spirit of reducing regulatory burden and avoiding multiple jurisdictions.

MCA says SEBI should prescribe stringent norms for listed companies only in exceptional circumstances such as inability to achieve the regulatory objective through subordinate legislation under the Companies Act.

Noting that CCG's recommendations call for several amendment to SEBI (Listing Obligations and Disclosure Requirements) Regulations (LODR Regulations), MCA has claimed that the proposed reforms come under the domain of "core company law principles" and thus under the Companies Act.

The Letter says: "It is felt that the core company law principles for which specific provisions have been provided in the Act and which should be applicable to all companies uniformly should not be proposed for modification for listed companies."

Articulating its intent to protect its regulatory turf, MCA has drawn CCG's attention to Section 24 of the Companies Act 2103. It empowers SEBI to administer Act's provisions relating to securities and dividend.

MCA adds: "It would be in keeping with the intention of law makers that administration of other provisions specifically provided are not brought under SEBI through LODR".

The matter whether a reform should be implemented through Companies Act or SEBI regulations is secondary. The primary issue is whether recommendations are valuable or flawed.

If they are good as they are largely in the case of CCG, then the right way for MCA would be to tell SEBI that it would implement the recommendations by amending rules under the Companies Act.

Going beyond CCG's recommendations, MCA should itself improve the way it governance firms especially the ones that commit frauds. To deter recurrence of white-collar crimes, MCA should make public reports of cost audit and Serious Fraud Investigation Office (SFIO).

As put by G20/OECD Principles of Corporate Governance, "A strong disclosure regime can help to attract capital and maintain confidence in the capital markets. By contrast, weak disclosure and non-transparent practices can contribute to unethical behaviour and to a loss of market integrity at great cost, not just to the company and its shareholders but also to the economy as a whole".