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India’s company boards are due for another shakeup, and this time around investors should see some real change.
The reason to place a higher burden of expectation on the Uday Kotak committee, which submitted its report to the stock-market regulator, is that it’s at least attempting to break away from a 20-year tradition of trying to fashion a modern corporate governance code for India by aping the West.
Replicating the Adrian Cadbury report (UK, 1992) or the Sarbanes-Oxley Act (US, 2002) was never going to work in a country where 60 percent of publicly traded companies’ assets are family-controlled, and another 30 percent are under the government’s thumb. The main issue in India isn’t whether managers are acting as faithful agents of investors’ long-term interest; it’s the unequal relationship between majority owners and minority shareholders.
Even the $105 billion Tata Group, once India’s most admired conglomerate, is mired in a nasty squabble over minority suppression.
This tension is what Kotak, managing director of Kotak Mahindra Bank, is hoping to address—at least for listed companies. If his recommendations are accepted, 50 percent of directors will have to be independent, and of those, one must be a woman.
Proposed start of non-executive director rules—April 2020
Starting April 2020, companies with a public shareholding of 40 percent or more will need a non-executive director as chairperson to prevent excessive concentration of power in one individual. Friendly accommodation—where I serve as an independent director in your company and you in mine—will have to stop. Boards must meet more often, and disclose if they refuse to accept any of the recommendations of audit or remuneration committees.
Finally, related-party transactions, which is what makes minority investors the most wary of committing to family-run businesses, will have to be detailed every six months. The definition of “related party” will be made stricter to prevent sweetheart deals from going undetected. And if one large shareholder awards a contract to a brother-in-law, then another controlling insider won’t be prevented from trying to vote it down simply because they too are, legally, a related party. They can also say no, though they can’t vote yes.
If all this seems like regulatory overkill, then it’s only because the beast of bad behavior is running amok. (See this example, and this one.) Not only do “promoters” of a listed firm routinely shortchange other investors, even companies that aren’t family run are behaving as if they were.
Take Kotak’s own banking fraternity. Standard Chartered Plc changed its India CEO in November 2015, three months before it announced $1.3 billion in loan impairments in the country, an 800 percent jump. A couple of “professionally” run Indian lenders—those that are not state-owned—are on the same leaky boat. Every quarter, their bad-loan situation gets embarrassingly worse. But the boards of ICICI Bank Ltd. and Axis Bank Ltd. never felt they owed it to shareholders to find new CEOs.
The Kotak report will undoubtedly give independent directors more muscle. The courage to flex them will still have to come from within.
— Bloomberg