In this essay we will discuss about:- 1. Introduction to Indian Corporate 2. Liberalisation of the Indian Economy and Responsibility 3. Transparency and Corporate Governance.
Essay on Introduction to Indian Corporate:
Corporate governance has been a much discussed subject in the financial market place over the last few years. Backed by the initiatives of the market regulator, the standards of corporate governance in India have come a long way since the turn of the millennium.
Listed companies in India need to disclose in their reports shareholders, details of attendance and remuneration of directors in board and board committees, management discussion and analysis, results and for the company, segmental revenue, profits and capital employed, details of ‘related party transactions’, etc.
As in many other aspects, Indians is a study in contrasts when it comes to corporate governance. India is host to several companies that can justifiably be classified as among the best in the world on maintaining high standards of corporate governance. At the same time the numbers of companies in India that have appalling standards of corporate governance are also legion.
While there is no denying the last few years there has been significant progress in corporate governance in India, much more needs to be done before investors rid themselves of a certain level of distrust about company managements.
A few recent examples typify the wide chasm between corporate governance in spirit and in practice. A prominent Indian listed company is in the process of putting up a large infrastructure project that is sought to be financed in a rather interesting fashion. The equity component is expected to be provided by the promoter of the listed entity in a rather convoluted and indirect manner, while a significant portion of the financing is by way of subordinated debt provided by the listed company.
This debt is an interest-free long-term loan with an undertaking from the listed company that the amount will not be recalled till the outside term loans are repaid. In essence, the shareholders of the listed company, by sacrificing a fair return on the money that is being lent out by their company, will help create wealth for the promoters.
There may at best be an innocuous disclosure in the annual report of the listed company clubbed along with other loans and advances, which too may not be required because the project company and the promoters may not be strictly related parties as per the relevant provisions.
It may not be out of place to imagine that at a future date, when the project is up and running and possibly generating substantial profits, a case will be made out to merge the two companies resulting in a substantial increase in the shareholding of the promoters in the listed entity.
This sleight of hand would have been achieved while adhering to all the tenets of corporate governance as required by the regulations. The shareholders of the listed company would possibly be not even aware of the huge transfer of wealth that would have occurred right under their noses and they could have anyway done little even if they were aware of the goings on.
Another such instance is the case of a successful mid-sized listed company, the promoters of which have agreed through the corporate debt restructuring route to take over a sick company in their line of business on very favourable terms that would take the combined capacity to double their existing capacity.
This involves writing down the debts of the sick company by half and restructuring the remainder at a very low coupon resulting in a low level of debt in net present value terms. There would simultaneously be a reduction in the existing equity capital and some fresh equity capital would be pumped in by the new owners. The sick company is expected to become highly profitable once the capital is restructured, given the synergy that exists between the two production capacities.
The temptation for the promoters to directly take over the sick company, while using the listed entity to indirectly finance the transaction and to derive the benefits of synergy, may prove too hard to resist. Again there is no violation of the regulations relating to corporate governance though significant wealth that should have accrued to the shareholders of the listed company would have been transferred. There is little that shareholders can do in such instances other than selling their shares.
However, there has been one case recently where a determined group of shareholders have taken on a company promoter — one the oldest business families in India — who was well on his way to short-change them. This involved an elaborate but devious demerger and takeover scheme that would have ended up transferring the valuable investments of the listed entity at a traction of its market value to another company that would have been largely owned by the promoter.
The resolutions relating to the scheme of arrangement were sought to be pushed through by muzzling the minority shareholders who were opposing them. A ‘determined set of shareholders have taken the matter to court and got some unexpected a support from the Registrar of Companies which may hopefully result in blocking the devious scheme of arrangement.
These real life examples would lead one to believe that prescriptive corporate governance, in the final analysis, ends up being just an exercise in “ticking the boxes”. Market regulators generally concern themselves about prevention of known and anticipated malpractices. However, me manipulators and law breakers are generally a step or two ahead of the law makers and it is only shareholder vigilance that can help bring recalcitrant company managements to stick to the straight and narrow path.
Where company managements run their businesses under the order of being honest and fair to all stakeholders there is rarely a reed to have elaborated bureaucratic prescriptions relating to corporate governance. In the final analysis, given that corporate democracy is about the rule of the majority, the true 1651 of corporate governance is the manner in which minority interests are addressed by the majority. This is a far cry from the ‘gesture governance’ that has increasingly become commonplace in corporate India.
Essay on Liberalisation of the Indian Economy and Responsibility:
The word ‘corporate governance’ has become a buzzword these days because of two factors. The first is that after the collapse of the Soviet Union and the end of the cold war in 1990, it has become the conventional wisdom all over the world that market dynamics must prevail in economic matters. The concept of government controlling the commanding heights of the economy has been given up. This, in turn, has made the market the most decisive factor in settling economic issues.
This has also coincided with the thrust given to globalisation because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers. Globalisation involves the movement of four economic parameters namely, physical capital in terms of plant and machinery, financial capital in terms of money invested in capital markets or in FDI, technology, and labour moving across national borders.
The pace of movement of financial capital has become greater because of the pervasive impact of information technology and the world having become a global village.
When investments take place in emerging markets, the investors want to be sure that not only are the capital markets or enterprises with which they are investing, run competently but they also have good corporate governance. Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken.
In other words, when investments take place across national borders, the investors want to be sure that not only is their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or involving moral hazard.
Corporate governance, therefore, calls for three factors:
(a) Transparency in decision-making;
(b) Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and
(c) The accountability is for the safeguarding the interests of the stakeholders and the investors in the organisation.
Implementation of corporate governance has depended upon laying down explicit codes, which enterprises and the organisations are supposed to observe. The Cadbury’s code in United Kingdom was the starting point, which led to a number of other codes. In India itself we have the Kumaramangalam Birla code as a result of the committee headed by him at the behest of the SEBI.
Earlier, we had the CII coming up with the code for corporate governance recommended by the committee headed by Shri Rahul Bajaj. The codes, however, can only be a guideline. Ultimately effective corporate governance depends upon the commitment of the people in the organisation. The very first issue of corporate governance in India is, do the India managements really believe in corporate governance.
Essay on Transparency and Corporate Governance:
Corporate governance depends upon two factors. The first is the commitment of the management for the principle of integrity and transparency in business operations. The second is the legal and the administrative framework created by the government. If public governance is weak, we cannot have good corporate governance.
The dramatic Enron case has highlighted how companies, which were the darlings of the stock market and held up as models for vigorous and innovative growth can ultimately collapse like a house of cards as they were based on fraud and dishonesty. The association of the accounting firm Anderson has also raised a doubt about the credibility of even well regarded global players.
In the Indian context, the need for corporate governance has been highlighted because of the scams we have been having almost as an annual feature ever since we had liberalisation from 1991. We had the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scan, Vanishirig Company Scam, Bhansali Scam and so on. I have been suggesting that we should learn from especially the United States to see whether we can replicate similar conditions in our capital market.
It is not that the United States is free of scams. Right now the Enron issue is examined by a number of committees at different levels in the United States. At the end of all these examinations, they are likely to come with a better model. In the Indian corporate scene we must be able to induct global standards so that at least while the scope for scams may still exist, we can reduce the scope to the minimum.
With according to the experience of a Central Vigilance Commissioner, I find the legal and administrative environment in India provides excellent scope for corrupt practices in business. As a result unless a management is committed to be honest and observe the principles of propriety, the atmosphere is too tempting to observe good corporate governance in practice.
We should approach the corporate governance issue in India not merely from the point of view of the Companies’ Act or the guidelines which can be issued like the Kumaramangalam code or the Bajaj code but look at the entire network of various rules and regulations impinging on business so that there is an integrated wholistic system created for ensuring that transparency and good corporate governance prevail.