Sunday, January 24, 2010

Urgent Need to Improve Corporate Governance in India

Sources:
FT.com: Satyam episode highlights India corporate flaws; SanLuisObispo.com: Lax Indian rules still problem after Satyam fraud; ACGA-ASIA.org: ACGA White Paper on Corporate Governance in India

India will risk the integrity of its capital markets and foreign investor participation will decrease unless it improves corporate governance laws quickly, says the Asian Corporate Governance Association ("ACGA"), an advisory group in Hong Kong. Last year, the head of Satyam Computer Services confessed to the largest fraud ($2.5 billion) in Indian corporate history, and this well shows deficiencies in India's corporate governance regime. The "ACGA White Paper on Corporate Governance in India," released on January 19, 2010, aims to provide government officials, financial regulators, listed companies, and investors with recommendations for strengthening corporate governance in India. The recommendations are based on feedback from foreign institutional investors and local market participants including the California Public Employees' Retirement System, KPMG, Deloitte and White & Case.

According to the report, despite the reforms enacted in recent years, "critical areas" of corporate governance still remain unimproved and there needs to be long-term efforts to reform corporate governance. The report specifically makes recommendations in five areas: shareholder meetings and voting; related-party transactions; preferential warrants; corporate disclosure; and the auditing professions. One of the main recommendations is to empower institutional investors because controlling shareholders have too much power in India. In addition, investors need to be informed of shareholder meetings earlier and be able to instruct their proxies to have a voice at the meetings. In India, companies often hold annual meetings in out of the way places (ICICI Bank, the largest private sector bank in India, holds its meetings in Baroda, a small city in Gujarat). The report also calls for overhauling the weak regime governing related-party transactions (e.g., providing independent shareholders with the power to approve large transactions). Regarding corporate disclosure practices, the report criticizes that audit firms commonly use bank account information provided by clients rather than independently verify the information.

After the Satyam scandal, there have been some changes to improve corporate governance. For example, many companies have been focusing on corporate governance and taking investor feedback more seriously, according to Nilesh Shah of ICICI Prudential Asset Management Company Ltd. Regulators have implemented some reforms such as requiring greater disclosure of the holdings of controlling shareholders. However, there has been no extensive structural reform, and some worry that the Satyam scandal would make it more difficult to root out fraudsters as they will work harder to evade detection.

Discussion:
1. According to the SanLuisObiopo's article, many Indian businesses are rooted in "old family empires run by men who are happy to take money from public shareholders but loathe to cede control." A corporate lawyer in Mumbai, Nishith Desai, also said that "the founders of a company forever thought they are the proprietors," and don't want to be answerable to outsiders." What are your thoughts on these remarks?
2. How does corporate governance in India compare with corporate governance in China?

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