Shubi looks at the impact of the Satyam scandal and analyses the need for improved corporate governance practices in India..The Satyam scandal stunned the Indian business community and shook the confidence of foreign investors in Indian corporate governance. Naturally, questions have since been raised about investing in a country where corporate governance standards have apparently not kept pace with a rapid rise in economic power. This is unfortunate because the scandal occurred against a backdrop of steadily improving governance practices in India. However, to be sure, further reforms are still needed in certain critical areas..This article is the first in a three-part series that analyzes the Asian Corporate Governance Association (ACGA) White Paper on Corporate Governance in India, which echoes this very sentiment. The paper was published earlier this year and is based on research and interviews with investors and other market participants. It concluded that while India has enacted numerous reforms in corporate governance, especially in the area of company boards, independent directors, and disclosure and accounting standards, certain critical areas, such as shareholder meeting and voting procedures, regulation of affiliate transactions, issuance of preferential warrants, and quality of corporate disclosures, are in need of further improvement..Arguably, corporate governance problems are prevalent in India because Indian business culture has not kept abreast of economic and regulatory changes in the market. First, many Indian businesses are old family establishments and while controlling shareholders may welcome cash infusions by outside investors, they may hesitate to relinquish control. Second, punitive tax rates which peaked during the 1970s encouraged widespread tax evasion. While the gradual lowering of corporate tax rates led to the abatement of questionable practices, some habits of old likely continue. To be sure, not all companies indulge in such practices and top Indian companies generally strive to have good governance procedures in place. For instance, Infosys is widely-known as having an excellent reputation when it comes to corporate governance..However, many of the problems with the Indian governance structure highlighted in the ACGA paper result not from lack of compliance with existing rules, but from the inadequacy of some of the rules themselves. Both regulators and companies are therefore well-advised to enact further reform. The ACGA paper discusses several key governance areas that are in need of improvement and issues recommendations with respect to each. It specifically notes that changes to shareholder meeting and voting procedures are especially vital because this is an immediate and growing area of concern for foreign institutional investors..One would think that shareholder voting would be straightforward; however, in reality it can be outmoded and counter-intuitive. According to the ACGA, institutional investors in India encounter various obstacles. First, detailed agendas for shareholder meetings are often not easily available. Many companies neither upload these documents to the websites of the two main Indian stock exchanges (the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)), nor do they make them clearly available on their own websites. Second, votes are customarily counted in India by a “show of hands” rather than by a “poll.” This former method effectively gives each shareholder an equal voice regardless of the number of shares it owns. But the inequity does not stop there. Under Indian law, proxies are not allowed to speak at meetings or vote on a show of hands. Even though they can vote on a poll, since voting by a show of hands is the norm, the proxy votes of shareholders who cannot attend meetings are seldom counted. Third, the lack of voting by poll also means a lack of detailed information on the results of meetings. Even if polls are called, the results are not always published on the company’s website because there is no legal requirement to do so..The ACGA has issued various recommendations to address the problems set forth above. For instance, it calls for the posting of meeting notices well in advance of a meeting on a company’s website and the websites of both the BSE and the NSE, as well as the archiving of such notices on all three websites. Further, the ACGA recommends that proxies be allowed to speak at meetings and that full voting results be published after meetings take place..In general, improvements with respect to corporate governance should not be delayed. This is true especially in an area such as shareholder meetings and voting processes where the fix is relatively simple and inexpensive to implement. Prompt action will make Indian markets more transparent and appealing to foreign capital and enable India to become an increasingly important international financial center..The next article will discuss the potential for abuse under the current Indian system when it comes to affiliate transactions and preferential warrants and various recommendations issued by the ACGA to address this concern
Shubi looks at the impact of the Satyam scandal and analyses the need for improved corporate governance practices in India..The Satyam scandal stunned the Indian business community and shook the confidence of foreign investors in Indian corporate governance. Naturally, questions have since been raised about investing in a country where corporate governance standards have apparently not kept pace with a rapid rise in economic power. This is unfortunate because the scandal occurred against a backdrop of steadily improving governance practices in India. However, to be sure, further reforms are still needed in certain critical areas..This article is the first in a three-part series that analyzes the Asian Corporate Governance Association (ACGA) White Paper on Corporate Governance in India, which echoes this very sentiment. The paper was published earlier this year and is based on research and interviews with investors and other market participants. It concluded that while India has enacted numerous reforms in corporate governance, especially in the area of company boards, independent directors, and disclosure and accounting standards, certain critical areas, such as shareholder meeting and voting procedures, regulation of affiliate transactions, issuance of preferential warrants, and quality of corporate disclosures, are in need of further improvement..Arguably, corporate governance problems are prevalent in India because Indian business culture has not kept abreast of economic and regulatory changes in the market. First, many Indian businesses are old family establishments and while controlling shareholders may welcome cash infusions by outside investors, they may hesitate to relinquish control. Second, punitive tax rates which peaked during the 1970s encouraged widespread tax evasion. While the gradual lowering of corporate tax rates led to the abatement of questionable practices, some habits of old likely continue. To be sure, not all companies indulge in such practices and top Indian companies generally strive to have good governance procedures in place. For instance, Infosys is widely-known as having an excellent reputation when it comes to corporate governance..However, many of the problems with the Indian governance structure highlighted in the ACGA paper result not from lack of compliance with existing rules, but from the inadequacy of some of the rules themselves. Both regulators and companies are therefore well-advised to enact further reform. The ACGA paper discusses several key governance areas that are in need of improvement and issues recommendations with respect to each. It specifically notes that changes to shareholder meeting and voting procedures are especially vital because this is an immediate and growing area of concern for foreign institutional investors..One would think that shareholder voting would be straightforward; however, in reality it can be outmoded and counter-intuitive. According to the ACGA, institutional investors in India encounter various obstacles. First, detailed agendas for shareholder meetings are often not easily available. Many companies neither upload these documents to the websites of the two main Indian stock exchanges (the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)), nor do they make them clearly available on their own websites. Second, votes are customarily counted in India by a “show of hands” rather than by a “poll.” This former method effectively gives each shareholder an equal voice regardless of the number of shares it owns. But the inequity does not stop there. Under Indian law, proxies are not allowed to speak at meetings or vote on a show of hands. Even though they can vote on a poll, since voting by a show of hands is the norm, the proxy votes of shareholders who cannot attend meetings are seldom counted. Third, the lack of voting by poll also means a lack of detailed information on the results of meetings. Even if polls are called, the results are not always published on the company’s website because there is no legal requirement to do so..The ACGA has issued various recommendations to address the problems set forth above. For instance, it calls for the posting of meeting notices well in advance of a meeting on a company’s website and the websites of both the BSE and the NSE, as well as the archiving of such notices on all three websites. Further, the ACGA recommends that proxies be allowed to speak at meetings and that full voting results be published after meetings take place..In general, improvements with respect to corporate governance should not be delayed. This is true especially in an area such as shareholder meetings and voting processes where the fix is relatively simple and inexpensive to implement. Prompt action will make Indian markets more transparent and appealing to foreign capital and enable India to become an increasingly important international financial center..The next article will discuss the potential for abuse under the current Indian system when it comes to affiliate transactions and preferential warrants and various recommendations issued by the ACGA to address this concern
