Over the past year, two of India’s most respected business groups — the Tata conglomerate and IT services group Infosys — have been wracked by infighting that has cast a shadow over the country’s reputation for corporate governance.
Now, the Indian securities regulator is poised to overhaul governance rules, aimed at addressing complaints about the power of company founders and their families, and boards that too often fail to properly scrutinise decisions.
The Securities and Exchange Board of India will on November 4 close a consultation on recommendations put forward this month by a committee it commissioned under Uday Kotak, billionaire founder of Kotak Mahindra Bank. Proposals include the separation of chairman and chief executive roles, as well as increasing the presence of independent directors and strengthening their obligations.
Analysts in Mumbai see the push as part of a drive to increase transparency under the government of Narendra Modi, which has courted controversy with its disruptive cancellation of high-value banknotes in the name of wiping out illicit hidden cash.
“It’s all about how investors can get more confidence in the companies they’re investing in,” said Amit Tandon, co-founder of proxy advisory group Institutional Investor Advisory Services, who was a member of the committee. “Global investors have the option of going for the Philippines or Brazil, and we have to make sure India remains an attractive destination.”
International studies have found India superior to many other emerging markets in its supervision of listed companies, thanks to its relatively developed stock exchanges and regulatory system. The World Bank’s 2016 Ease of Doing Business survey ranked India 130th overall — but joint eighth for protection of minority investors, level with Ireland and South Korea.
Yet in India, there has long been concern about the overwhelming power of “promoters”, or controlling shareholders. “Majority shareholders generally take the minority shareholders for granted,” said Neelkanth Mishra, equity strategist at Credit Suisse.
The Kotak committee recommended strengthening oversight by requiring a minimum of five board meetings a year, including one dedicated to long-term strategy and related matters such as succession planning.
A larger problem, however, is widely perceived to lie in the constitution of boards — notably the weakness of independent directors.
The issue came to the fore during the upheaval at Tata last year, when holding company Tata Sons successfully pushed for the ejection from three operating companies of independent director Nusli Wadia, who had resisted the sacking of Cyrus Mistry as group chairman.
This was criticised as a chilling sign for directors who stand up to promoters — already a rare phenomenon, according to Pranav Haldea, managing director of Prime Database, a research firm. “The majority of them [independent directors] are just there for the compliance requirements — they are essentially just yes-men,” he said.
The proposed rules would force changes at many listed companies, aimed at strengthening independent directors’ engagement.
Such directors would need to be paid at least Rs500,000 ($7,700) per year — a sum received by only one-third of independent directors at companies listed on India's National Stock Exchange, according to Prime Database research. At least half the board would need to consist of independent directors — a criterion that one-fifth of Indian listed companies fail to meet.
More big changes would be forced by the requirement to separate the roles of chairman and chief executive at companies where more than 40 per cent of the stock is owned by outsiders — a move that would hit tycoons including Mukesh Ambani of the oil refining group Reliance Industries.
It remains unclear how many of the recommended measures will come into force, although Mr Tandon notes that the recommendations of similar reports in 1999 and 2003 were broadly adopted by the regulator.
And there is widespread scepticism about the ability of regulation to stamp out the efforts of promoters to build pliable boards. “As with everything else, it will get gamed by promoters, who will do a box-ticking exercise and pay lip service to the whole thing,” said Saurabh Mukherjea, chief executive of Ambit Capital, a brokerage.
Yet the power of promoters is being naturally eroded, he argues, as their holdings are diluted and fragmented among family members.
Regulation is set to continue its push to defend the rights of outside investors, as the government seeks to encourage Indian savers to make more use of the formal financial system, Mr Mukherjea said. “The role of the stock market going forward isn’t just to give capital to Indian companies; it’s also to give a fair return to the Indian retail investor.
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