BT500 Wealth Creators Summit: What's behind the improving corporate governance practices in India

The introduction of e-voting for shareholders, LODR regulations and increased institutional investor involvement helped improve the standard of corporate governance in India, panellists at the BSE500 Wealth Creator Submit 2023 said on Wednesday.

JN Gupta, Co-founder & MD at Stakeholders Empowerment Services said there has been thousands of changes that have happened to improve the corporate governance over last few decades, but the one change that is still to be done is the implementation of everything, not in the letter but in the spirit. There, he says, is still a vacuum.

Gupta believes that all the effectiveness that is coming in corporate governance in last many years was due to the new Companies Act, where e-voting was permitted and participation by investors was facilitated.

"Earlier, the meetings used to happen in Timbuktu or Jhumri Telaiya and nobody was participating. Now with the e-voting, the participation has increased. The second thing is that taking cues from the Companies Act, Sebi came up with LODR listing obligations and that has impacted. Not only that, the impact of higher voting had happened in so effective way that now companies themselves fear the risk of rejection. That fear is now causing companies to follow what stakeholders say," Gupta said.

LODR stands for listing obligations and disclosure requirements.

Gupta said if his advisory firm needed a clarification, back in 2012 when he founded Stakeholders Empowerment Services, the company would shut the phone down on him. Now, he says, the companies calls him asking what is he writing. "The day the follow of the law in spirit happens, I would probably not be needed," Gupta said.    

It is not that the focus on corporate governance has gained prominence now. The markets regulator has been focusing on corporate governance for a significantly long time, said G.N. Bajpai, Former Chairman at SEBI. 

Bajpai recalled: the market was going through what he called 'animated suspension" because of major market misconduct, the time he joined Sebi, which needed a wholesale re-orientation of all market practices. He cited Kumar Mangalam Birla Committee and Narayana Murthy Committee, which brought in significant amount of disclosures, accounting standards and the board room practices.

"Over a period of time successive Chairs and their teams have improved upon these, and eventually it has landed on a significantly high standards on disclosures and accountability," Bajpai said.

The session "The 4 Pillars of Corporate Governance" was moderated by Sourav Majumdar, Editor at Business Today.

Amit Tandon, Founder & MD, Institutional Investor Advisory Services said the Companies Act did help, not only by bringing in e-voting but also by getting in the "majority of minority" approval. Sebi brought LODR, tightened LODR had this listing agreement, which made it a lot easier to bring in regulatory changes by the way of special and ordinary resolutions.

Then came was Kotak committee, where there were focus areas was on gatekeepers auditor and the independent directions. They were given more powers, Tandon noted.

Besides, the ownership pattern of companies have changed drastically. Before the financial crisis, Indian promoters held 60 per cent equity and promoters about 20 per cent, which means for every three shares held by promoters then, one share was owned by institutions, Tandon said.  

Tandon said, on an average, 50 per cent stake today is with promoters and 35 per cent with institutions.

"Institutional shareholders have started sitting on the high table, so to speak," he said adding that now you got institutional investors will deep pockets, who own 8-9 per cent of company stakes against 1-2 per cent in the past. These investors, Tandon said, cannot be ignored. "Now with e-voting, every vote is being count. Institutional investors are much more engaged today," Tandon said.

As far as governance qualities are concerned, Tandon said one should look at who are the other investors--  the more institutional investors a firm has, the better you would expect governance quality to be. He said the companies which communicates more tend to be better governed; those poorly governed do not communicate much.

Tandon recalled a study in which he found that the companies that comes out with annual general meetings (AGMs) in June and July have better financial performance than the ones that comes with AGMs in August. Also, the ones that comes up with AGMs in August have better performance than the ones that host AGMs in September. Loss-making companies, Tandon said, are more likely to have AGMs in the last week of September than before! 

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