Relevance: GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation; Important aspects of governance, transparency and accountability.

Relevance: GS-4: Corporate Governance

Key Phrases: Co-location, NSE, SEBI, Corporate Governance, Whistleblowing, Algo-trading, High Frequency Trading, Uday Kotak Committee, Companies Act.

Why in News?

• With the final order on the co-location scam at the National Stock Exchange (NSE) coming in from the Securities and Exchange Board (SEBI), it is time to take a step back and relook both corporate structures and measures to prevent corporate governance failures.

Key Points:

• The NSE is expected to act as our stock market’s first point of control, a preliminary regulator before the legal oversight exercised by the Securities and Exchange Board of India.
  • Yet, forensic reports on the NSE’s operations and governance offer disturbing evidence of multiple breaches, raising the spectre of a first-stage regulator in need of close supervision.
• The CBI probe into the case of NSE ex-MD Chitra Ramkrishna sharing confidential information with a mysterious yogi, has now widened to examine the irregularities in the exchange’s location facility.
  • Certain brokers are said to have benefitted from preferential access on NSE's trading platform between 2010 and 2015.
  • The controversy first came to light in January 2015 through a whistleblower's mail.

• The key executives, including MD &CEO Chitra Ramakrishna, have been indicted for violating the rules and also penalised, the board of the country’s biggest stock exchange seems to have got away lightly.
  • SEBI’s order says the board was aware that confidential information was being shared with an unknown person, but decided not to alert the regulator and stay quiet.
• As per SEBI, “NSE failed to administer the stock exchange with professional competence, fairness, impartiality, efficiency and effectiveness; failed to maintain the highest standards of personal integrity, truthfulness, honesty and fortitude in discharging their duties and has engaged in acts discreditable to their responsibilities; failed to perform their duties in an independent and objective manner; and failed to perform their duties with a positive attitude and constructively support open communication”.
• Infractions at the NSE, go beyond the misdeeds of one person and implicate board members who had the fiduciary responsibility of monitoring, fixing and reporting lapses and violations.
• With a long rope granted to the exchange’s top executives, its board apparently betrayed the trust of shareholders whose interests they had to protect.
• This ties in with Sebi’s announcement last week on institutional norms that company boards need not compulsorily split the posts of chairperson and managing director between two individuals, with this choice “voluntary" now.
  • This was a roll-back of a directive issued in 2018.
  • The idea itself seemed a bit inappropriate in the context of corporate structures where family-owned firms dominate our business arena, especially with such a long record of entrepreneurs who run their own businesses.
  • With the split idea floating around for four years, space was opened for political rent-seeking as corporate groups lobbied for relaxation.
• SEBI, in that sense, only worsened crony capitalism.
• The proof of the pudding lies in the empirical evidence of offences occurring in companies even where those posts had been separated, with NSE a prime example.
• In banking sector too, where role-separation has been in force for some time but failed to prevent scandals like those at Yes Bank and ICICI Bank.

• The problems in BharatPe, is another issue of corporate governance is playing out that will not only test the resolve of SEBI and the RBI, but also determine the future governance framework for technology startups.
  • The discomfort of its board with its founder and chief recently led to his temporary exit, amid reports of a toxic work culture, alleged irregularities uncovered by a forensic audit of its finances, and of internal talks over a possible equity-sale deal for his final departure.
  • How this case is resolved will test how regulators, financiers and the government tighten our frame of governance for startups.
• The other notable CG failure cases are IL & FS fiasco, Yes bank crisis, PMC Bank collapse, Lakshmi Vilas Bank merger with DBS Singapore – India operations, ICICI Bank – Videocon – Kochhar nexus, Tata-Mistry fallout, Satyam scam, Infosys imbroglio – CFO Rajiv Bansal exit and its aftermath.
• Collapse of Arthur Anderson, Enron, Barings Bank, Lehman brothers are some classic cases of failure of CG much to the chagrin of key stakeholders.

Steps Taken:

Corporate Governance (CG) standards have been gradually improved based on the recommendations of various expert committees.

• Some significant committees are:
  1. The Confederation of Indian Industry (CII)’s voluntary code of CG (1998), known as CII Code of desirable CG.
  2. Kumar Mangalam (KM) Birla Committee (2000) appointed by SEBI
  3. RBI Report of the Advisory Group on Corporate Governance (2001)
  4. Naresh Chandra Committee (2002) appointed by the Government
  5. N.R. Narayana Murthy Committee (2003) set up by SEBI
  6. J.J. Irani Committee (2005) – drafted by the Government of India.
  7. The latest one is the committee led by Mr. Uday Kotak – Committee on Corporate Governance (2017) instituted by SEBI.
• The significant changes were related to composition, strength and size of the board, appointment of non-executive (Independent) directors, their role and numbers, shareholder directors, their election process and related matters, orientation and training of directors, remuneration of directors, disclosure of remuneration policy, director’s remuneration and biographical information, board meeting and matters to be reserved for board decision, board’s performance evaluation, remuneration committee and related matters, General Body Meetings, appointment of auditors, Accounting standards, Financial reporting, Audit committee, recording proceedings of board meetings and host of interconnected norms.
• Corporate Governance is an integrated framework of provisions contained in Companies Act -2013, Clause 49 of the listing agreement that companies sign with the stock exchanges and through SEBI’s new Listing Obligations and Disclosure Requirement Regulations (LODR) of 2015.

Way Forward:

• All regulatory bodies, government of India and concerned ministries have been increasing rigor of CG standards from time to time and increased the surveillance on the conduct of the companies.
• But still the instances of weaknesses/failure in CG in corporate sector come to surface from time to time with its huge collateral risks to the orderliness of corporate sector.
• The lack of effectiveness of CG is not necessarily due to dearth of regulations, policies, procedures and systemic controls. It is more due to utter disregard towards implementation of CG norms in some institutions that manifested into huge operational risks.
• The regulators should go beyond records and data to read the simmering disorder much before risks hit the organisation.
  • The records and documentation of the entities will not show up facts that the management does not want to share with the regulators.
• Regulators should not resort to a tick-box approach, but should seek to balance the need for startup flexibility with that for best practices and accountability.
  • The regulators can always cross verify facts by talking to other appropriate people in the value chain before acting on the oral opinions/alerts.
  • It can introduce a separate surprise CG audit apart as a proactive risk mitigation tool.
  • Holding informal random interactions, discussions and consultations with line management and other middle order people to invoke oral whistle blowing clues.

Conclusion:

• Organisations need to realize that implementing CG is for their own sustainability and orderly growth. The cause of investor trust must never get short shrift. It’s vital to India’s economic success.

Source: Live Mint , Times of India

Mains Question:

Q. The saga of debacles amply shows that the current method of regulatory oversight is not able to manage risks arising from the Corporate Governance deficiencies. In light of above statement suggest needed reform in the Corporate Governance framework in the country. Discuss.