The weaknesses of corporate governance systems in India

Global investors are watching the lacunae in our current corporate governance structure and, more importantly, if we are serious about fixing them

Over the past few weeks, India Inc. was rocked by the Ashneer Grover-BharatPe controversy and the revelations around the National Stock Exchange (NSE)-Chitra Ramkrishna-Himalayan yogi saga. The fact that BharatPe, a celebrated start-up that became a unicorn last year with a subsequent three-fold valuation jump within six months, and NSE, a shining star in the evolution of India’s capital markets, were allegedly run arbitrarily with little or no internal check mechanisms points to gaping holes in India’s corporate governance system.

Trust, transparency and accountability are hallmarks of strong corporate governance that can help build investor confidence and earn their trust. (Shutterstock)

Beyond co-founder Grover’s now-infamous outburst against a bank employee, BharatPe’s bigger problems include alleged malpractices, financial irregularities and a toxic work culture. What is surprising was the silence of many reputed venture capitalists (VCs) who are investors and have board seats in the company. The fact that the board ordered an inquiry only after Grover’s purported audio clip went viral raises larger questions. What if the public relations disaster had not happened? Perhaps then the alleged mismanagement of the company’s funds and related party transactions, all unconfirmed and likely to be the basis for a protracted dispute, may never have come to light.

Grover is not the only founder facing ouster from his company. In 2015, Housing.com chief executive officer (CEO) and co-founder Rahul Yadav was fired after repeated run-ins with investors and the media.

Neither is the issue of poor governance and reckless CEOs restricted to India’s startups and promoter-driven companies. Former ICICI Bank CEO Chanda Kochhar’s fall from grace following allegations of quid pro quo in a loan case is another key lesson in weak corporate governance. The board’s role in this case, too, left a lot to be desired. Initially, the board of directors rallied behind Kochhar and gave her a clean chit. As the case caught public attention and came under intense media scrutiny, the bank was left with no option but to form an internal probe panel. The rest is history.

The revelations emerging from the NSE investigation seem outlandish, with Ramkrishna’s admission of depending on a mysterious yogi for her business decisions. Equally bizarre was her appointing Anand Subramanian as a strategic advisor at a salary that was 10 times more than what he was drawing at the time, and his rapid elevation to group operating officer in a span of two years, at a trebling of salary. It is hard to believe that this happened unbeknownst to the board in such a critical organisation. The board’s actions could at best be described as irresponsible and at worst, complicit.

The sordid saga at NSE revealed how arbitrarily one of the country’s most important market institutions was run. Other recent governance lapses resulted in the IL&FS collapse, the Yes Bank crisis and the DHFL scandal. In all these cases, the shareholders’ interest seemed to be the least priority. Each of these crises laid bare India’s weak corporate governance system.

Many issues plague corporate governance in India. First is the lack of accountability of controlling shareholders or promoters who pursue policies and practices in their own interest at the expense of minority shareholders. Many appoint friendly independent directors, ensuring them a free run. Next is the lack of transparency and inadequate disclosure requirements. This is compounded by weak enforcement of regulations by the Securities and Exchange Board of India (SEBI), the country’s market regulator. As a result, cases of management lapse may take years to resolve and end with warnings or mild punishments. Just last week, SEBI backtracked on a rule requiring the separation of the roles of the chairperson and MD/CEO for India’s top 500 companies that was to come into effect on April 1– a recommendation made by the Uday Kotak committee on corporate governance in 2017.

And, finally, the fact that markets in India do not punish poorly managed companies adequately for their misdeeds adds to the problem.

Last year, India’s startup ecosystem mopped up record investments of nearly $36 billion amid massive demand for digitisation due to the pandemic. At a time when India is rapidly emerging as the start-up capital of the world, it’s critical to fix the inadequacies in our corporate governance system to pave the way for future growth.

Analysts and investors have serious concerns about weak corporate governance ranging from opacity, lack of diversity and related party transactions, to concentration of powers and authority in promoters. India must seriously penalise auditors and boards of companies for overlooking management follies. A combination of disclosure, regulation, enforcement and investor activism can improve corporate governance.

Trust, transparency and accountability are hallmarks of strong corporate governance that can help build investor confidence and earn their trust. Companies where promoters act in the interests of shareholders tend to do better in the long run. What we need to remember is that global investors are watching the lacunae in our current corporate governance structure and, more importantly, if we are serious about fixing them.

Lloyd Mathias is a business strategist and angel investor 

The views expressed are personal.