Just over a year ago, in December 2008, one of the most dramatic investor conference calls in Indian corporate history took place.
Satyam Computer Services, the former flagship of the now-disgraced Indian information outsourcing tsar, B. Ramalinga Raju, had convened a call with fund managers to explain why he planned to buy out infrastructure companies belonging to his family.
The proposal to blow Satyam’s cash reserves during a global financial crisis on a family transaction without giving minority shareholders a chance to vote enraged India’s usually submissive institutional investors.
“You are putting the whole FDI [foreign direct investment] story of India at risk by adopting such third-grade corporate governance practices,” Pankaj Gupta of SBI Mutual Fund bluntly told Mr Raju.
Mr Raju, who a month later was arrested after confessing to defrauding Satyam, exposed governance shortcomings in India, and some rules were tightened in the aftermath of the scandal. Yet, according to institutional investors, India has some way to go before it can claim to have adopted international best practices.
A report by the Asian Corporate Governance Association, a Hong Kong-based advocacy group, to be unveiled in Mumbai tomorrow, makes recommendations on how to improve corporate governance in the country and narrow the gap with centres such as Hong Kong and Singapore.
“What we found in doing this report is that, in certain areas, India’s regulatory regime is weaker than we had thought,” said Jamie Allen, ACGA secretary-general.
Among the responses to the study, foreign and local institutional investors in India complained that they struggled to have their voices heard at company meetings. Notices of meetings can be published just days before the event and shareholders typically need to attend in person for their votes to be counted.
In developed markets, investors can far more easily appoint a “proxy” to attend on their behalf and can rely on the company to include their postal votes in any counts.
The report notes that the scope for misuse of warrants in India is “considerable”. These instruments allow holders to acquire stock on a specified date at a pre-determined price – usually set higher than the market price. However, in India, controlling shareholders (or “promoters”) can acquire warrants on a preferential and discounted basis – and so dilute minority shareholders.
One Indian shareholder lobby group last year brought the problem to the Bombay High Court to “expose a massive and orchestrated scam” by myriad Indian promoters which had issued warrants “for their personal aggrandisement”. The challenge was referred back to the market regulator, Sebi, which ruled that existing regulations were sufficient to protect minority shareholders.
On corporate disclosure, ACGA notes that companies do issue quarterly statements. But they only need to publish a full balance sheet or cash flow statement on an annual basis – although this may be raised to twice a year.
The structure of the audit profession, which lacks an independent regulator, also comes in for criticism. The strict caps on the number of partners and trainees that audit firms can employ are “a serious impediment to the development of individual firms”.
According to the report, it remains common practice for auditors to rely on bank account information provided by clients rather than independently verify the information with the bank.
Source:http://www.ft.com/cms/s/0/c85e0cda-03d1-11df-a601-00144feabdc0.html?nclick_check=1
