Hindustan Times ST (Mumbai) - Live
Strengthen corporate governance standards
Before January 23, billionaire Gautam Adani seemed invulnerable — an industrialist who had grown a seemingly invincible corporate empire. On January 24, New York-based investor research firm Hindenburg Research released a report accusing the Adani Group of “brazen stock manipulation and accounting fraud scheme over the course of decades”. The Adani Group refuted the allegations aggressively, even calling it a malicious, calculated attack on India. Within days, the impact of the report led to a $40 billion dip in Adani’s personal net worth and about $100 billion wiped off the Adani companies’ market value.
Regardless of whether the report’s assertions ultimately turn out to be accurate or not, it poses a serious threat of eroding investors’ trust in the country’s regulatory environment. The most important question arising out of the mess is that of corporate governance emerging as an Achilles heel for India.
In recent years, there has been a lot of discussion about corporate governance in India, with domestic experts pointing to an acute lack of accountability and transparency. In fact, reports that have appeared over the past few weeks suggest that some of the issues that Hindenburg highlighted were known to the market. Despite the outcry from these analysts and new regulations brought about in recent years, the status of corporate governance didn’t change much, and it continues to remain weak.
This points to a larger question: Why aren’t we able to pick up signals and issues before they become enormous? Or unless someone from outside the country brings it to our attention, pushing the global investor community to question India’s corporate governance standards? Why can’t we create a solid policy framework in which corporate governance issues are dealt with adequately within the confines of our system?
A big reason for this could be a lack of transparency. More often than not, many industrialists are guided by market pressure to maximise shareholder returns at the cost of sustainable business ethics and practices. As many have pointed out, the rot seemingly goes much deeper in India’s corporate sector.
More often than not, Indian companies have a concentration of power in the hands of a few individuals. Management and ownership are often inextricably linked in many businesses, resulting in conflicts of interest and a lack of transparency. This impairs shareholders’ and stakeholders’ ability to hold companies accountable and make informed decisions. This is closely linked to the issue of a lack of accountability and vigilance over independent directors in India’s corporate sector — a major indicator of healthy corporate governance.
Despite regulations mandating the appointment of independent directors, many Indian companies still lack sufficient representation of these individuals. Truly independent directors are essential to ensure accountability and transparency in a company’s operations. Their absence may result in a lack of checks and balances, which increases the risk of promoters acting on their whims, poor management, and unethical behaviour.
The infamous Satyam scandal of 2009 — in which the company’s founder and former chairman B Ramalinga Raju and his brother B Rama Raju were found guilty of criminal breach of trust — is the best known instance to highlight the importance of independent directors. More recently, the Securities and Exchange Board of India found irregularities in the National Stock Exchange, resulting in its former chief executive officer Chitra Ramakrishna’s arrest in March 2022. There have been numerous other controversies, including at ICICI Bank, IL&FS and Yes Bank, and even among new-age unicorns such as BharatPe. Instances like these don’t bode too well for the future of a secure and free market in India.
Another issue that affects corporate governance adversely in India is that, more often than not, regulations are not enforced strictly. Indian laws on corporate governance are not as comprehensive as, say, the Sarbanes-Oxley Act in the United States. Even then, companies have been caught breaking the law with little fear of repercussion because the legal and regulatory systems need to be faster and more effective. Even when individuals are caught indulging in scams or financial malpractice, they escape punishment through unending litigation, or run off to foreign shores without fear of being deported to India. This lack of enforcement and fear of the law has resulted in a culture of non-compliance.
We should remember that India’s weak corporate governance framework hurts the economy as a whole. Poorly managed businesses are more likely to fail, causing financial losses for investors and disrupting the economy. This has become especially clear in recent years, with several high-profile cases of corporate fraud and mismanagement resulting in significant economic and social consequences.
This issue should be dealt with as an event with the potential to erode investor confidence in India. For India to achieve its economic goals, it is imperative to take effective corrective action to ensure the credibility of our corporate sector. If we want to enhance India’s reputation as a reliable investment option, the government must take necessary action to strengthen and enforce regulations. We can no longer brush this under the carpet.