CNV3-I1-2-Interview

In the recent past India Inc has witnessed one of the most challenging times w.r.t. corporate governance (CG). It is quite evident that corporate governance issues not only shake investor’s confidence but also create a dent in shareholder value and cause severe losses to the exchequer. The issues in recent past involve money laundering, fraud, diverting and syphoning of funds to benefit self, relatives and other interested parties. These losses run into billions of rupees which could have been used for nation building and further strengthening of our economy. In India we have seen instances from aviation czar, pharma giant, financial conglomerate to IT transnational, eroding shareholder value and investor confidence. Recognizing the importance of this subject, we at ITM had a freewheeling conversation with Mr Robin Banerjee on the subject. For the benefits of the reader, following is an excerpt from the interview conducted by Mr Alok Sheopurka, who is currently holding a position of Executive Vice President & Head of HR in HDFC Mutual Fund, Mumbai and a PhD Research Scholar at ITM.

Q1. Please share an overview of the state of CG in India and how it has affected us?

A.      Today the world of CG is getting complicated. Intelligent people are getting greedy and many are structuring products and services only to raise money and to make an exit without repaying the debt in full. In the past, there have been several cases where governance was compromised but many were let off the hook. However, of late, India has taken several few steps to arrest the escalation of the lack of governance issues. The changing regulatory framework is slowly making sure that the entrepreneurs have more skin in the game, and any negative fallout in the business would also affect the businessmen. Let us take a recent example where governance corrective steps have resulted in a dip in that Indian economy in 2016 and 2017. This recent slower economic growth cannot be attributed to demonetization or GST alone, contrary to popular opinion. The largest factor is the governance course correction, which led to stopping of evergreening of loans (a process where the financial institution provides a new loan with the underlying objective to repay the old loan) in our banking system. Similarly, the introduction of RERA (Real Estate Regulatory Authority) has started regulating the real estate construction industry. Some of the other initiatives taken by the government like Insolvency & Bankruptcy Code, tightening of various regulators (e.g. action taken by SEBI and RBI in Sahara case or Kingfisher cases) should also help in tightening corporate governance and intern provide a better outlook of economic of growth.

Q2. Can you share a few cases for our readers where CG has been diluted thereby affecting stakeholders?

A.      There are several instances, where CG standards have been violated. Kingfisher airlines, debenture issue by Sahara, Nirav Modi’s fraudulent act, where Punjab National Bank (PNB) officials colluded with Firestone Trading and issued letter of credit (LC’s) without backup securities to name a few. In the famous PNB case, some LC’s were issued violating all established procedures and the same continued for over seven years without any audit objections or bank reconciliation, which ended up being Rs.14000+ crore fraud. Similarly, cases of appropriate practices by persons heading large banks, stock exchange (NSE scams) and the case of IL&FS have also rocked investor confidence.

Such cases not only affected shareholder returns but also lead to huge losses to the exchequer. There are several such cases, which can be studied to see how CG issues have emerged as top concerns for regulators, government and investors alike and have led to the compromising system, process and governing standards.

Q3. What are your comments on current sets of rules and regulation and their adequateness to ensure good corporate governance standards in India? Are current rules and regulations adequate to prevent large scale organized corporate frauds?

A.      I think that the current framework is better than earlier provisions, however, it cannot be said that it is enough to meet gold standards of CG. We should also note that excessive regulations may not achieve our objective of having a society free form CG compromises or making India Inc free from corporate frauds. This requires focusing on building overall awareness in society and work on significantly improving corporate ethos. We have a long way to go in this direction viz.  making a futuristic framework to ensure high standards of corporate governance and simultaneously work with society to bring a change. We need to consider developing systems and processes, which will work for us rather than mindlessly borrowing practices of other countries. I think after recent reforms rules and regulations are adequate, but we need to galvanize our efforts and resolve to comply with standards without any extraneous influence.

Q4. Sir, as you have worked in many countries across the globe, can you elaborate, where India stands in CG Regulations & Practices as compared to developed countries?

A.      I would say almost all economies are more or less similar when it comes to CG standards. However, the western European countries especially, Germany, stand taller than other parts of the world. Indian Inc must think about ethics and its actual practice as it has a long way to go before globally accepted standards of CG are achieved.

Q5. Has the Sarbanes-Oxley Act introduced in 2002 been able to check CG issues in the US?

A.      The purpose of the Sarbanes-Oxley Act was to review legislative audit requirements and protect investors by improving the accuracy and reliability of corporate disclosures. This was done after Enron fraud. It legislates stricter internal audit practices, among others. However, there are several cases, which surfaced in spite of copybook style compliance requirements.

Q6. What is the role of CG in Emerging economies like India that a country’s business environment must be maintained and operated in a manner that is conducive to investors’ confidence?

A.      Emerging economies have a steep learning curve w.r.t. developing a world-class CG framework and achieving it. Indian economy is growing at 7-7.5% CAGR. Hence it is even more critical for the country to quickly strengthen its existing governance framework and ensure that investors have full faith in our CG standards. Apart from use of technology, effective government vigilance, speedy resolution of legal cases, trained and unbiased judiciary, robust legal framework, exchange of data at international level, extensive training to government machinery, building awareness and culture of ethical practice are some of the few steps, which must be considered to upgrade our current level of CG. Hiring private sector executives for government roles and the effective government–business interface is also key to improving CG standards in our country.

Q7. Can companies regulate their directors/officers beyond what is prohibited by the law, as self-regulation is also considered an effective means of creating shareholders value?

A.      Self-regulation is the best form of maintaining impeccable CG standards in any organization. If companies, feel that any specific act may dilute CG standards and adversely impact shareholder value it may go beyond what specified in law and decide to follow actions which help to achieve gold standards of CG. There are many examples where companies have been following practices like “no bribe” policy even before such regulations were introduced.

Q8. The effective way of tackling the CG problem is by encouraging the companies to practice self-regulation and taking prophylactic action, but how should one go about it?

A.      Self-regulation is the outcome of culture and ethos. The overarching framework of CG must provide the tools to embrace the organization’s culture and ethics; which should all align with the agreed risk appetite and tolerances. Once we begin work keeping the above in mind, we would make significant progress.

Q9. To what extent can Independent directors prevent CG issues ahead of times?

A.      While the new Companies Act has defined responsibilities of Independent Directors (ID’s) and respective regulators are nudging ID’s to play more active roles, we are still far away from the day when ID’s will proactively work to raise issues of CG and fraud. I also believe that ID’s must visit the company workplaces like factories, commercial office and other touch points to get first-hand feel of the on-ground ethical situation. They should directly interact with some executives to understand the gap between what is presented in a board meeting versus ground reality to spot early warning signals of risk and governance issues.

Q10. What are the key challenges and what needs to be changed in the area of CG practices in India?

A.      Our language, beliefs, cultures, tastes, attitudes and politics have developed over centuries. This is what makes us unique. Unsurprisingly, our business practices have also evolved in an equally diverse pattern and we are driven by different motives. Developing one single legal framework to ensure high standards is a daunting task. In order to achieve an improved situation, we can consider incentivizing Independent Directors to be part of profit sharing and make them more accountable. Similarly, actions like gender diversity in a board, better coordination between business and government, sensitive regulatory and statutory framework could be other areas, stronger audit environment, would help. The proximity of business and politics is not a very healthy trend and we should watch out such nexus.

Q11. Finally, how optimistic are you w.r.t. future and India’s ability to develop world-class CG standards?

I am optimistic. The recent introduction (2016) of certain legislation like GST (Goods and Service Tax), and IBC (Insolvency and Bankruptcy Code), are definitely in the direction of improving things. Plus, the banking regulation of ensuring repayment of loans on time, would help borrowers to behave properly. The government agencies like SEBI and CBI have become much more active and recent stories of entrepreneurs and managers being taken to task for not following good governance principles, are the right noises. However, good governance is a matter of ethos. It is as a nation we need to believe and practice.

Let’s remember, companies, which have lasted long have worked on the principles of ethics and treated its customers, employees, government and the society at large, fairly and diligently. There is never any short cut to the creation of wealth.

We need to all remember that historic evidence amply proves corporate longevity and wealth creation stands on the superstructure of good corporate governance.

Robin Banerjee is Managing Director of Caprihans India Ltd, India having over 35 years of experience in several large multinational corporations in more than 20 countries. He is a Chartered Accountant, Cost and Management Accountant, Company Secretary, and has a master’s degree in commerce. He worked in several large multinational corporations, which include General Manager at Hindustan Unilever, MD-CFO of Arcelor-Mittal (Germany), Executive Director of Thomas Cook, Director (Finance) of Essar Steel, Group CFO of Suzlon India. He has written three books on indirect taxation. His most popular book is “Who Cheats and How? Scams, Fraud and the Dark Side of the Corporate World”, published by Sage in 2015 and is in its third reprint. As a thought leader, he has been working with several government bodies and institutions like CII where he leads Finance & Tax committee, Policy advocacy committee and Ease of Doing Business Committee. He has also been a keynote speaker and a turnaround specialist.

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