Former SEBI chief M Damodaran on how only a few companies view compliance as an investment
Be it the unearthing of the NSDL IPO scam, banning of hot money instruments linked to P-notes in derivatives, passing of first order in a front-running matter or returning money to investors under disgorgement concept, market regulator SEBI was a trend-setter during the tenure of Meleveetil Damodaran between 2005 and 2007. Damodaran is currently an observer of corporate governance practices. A recent report by Excellence Enablers, a think-tank founded by Damodaran, has highlighted how some of the top corporations are not complying with corporate governance norms. In an interview with Palak Shah, he shares his views on SEBI’s functioning and evolving corporate governance practices.
The allegation that SEBI has been somewhat soft on one or more MIIs has been around for many years. This perception should be addressed in the only manner possible by transparently dealing with all MIIs on an equal footing. A part of the problem is that a couple of MIIs, at least around a decade or more ago, were seen as having the blessings of the Ministry, and regulatory attempts to enforce good conduct were not viewed with favour. I do not believe that there is a leadership crisis at SEBI. That said, a relentless focus on expeditious disposal of matters will certainly help the regulator and the markets.
Like most organisations, SEBI has been continuously trying to respond to the challenges of a fast changing and more complex universe. I do not think that anyone can be in denial when a number of problems arise in the securities market. The appellate system is in place to ensure that such errors and omissions as might arise or can be corrected in systemic interest. From each such failure, whether at the entity level or at the regulatory level, lessons should be learnt for the future, while speedy corrective action should be taken in each instance. In a conversation with me on 26th November, 2020, chairman Ajay Tyagi clearly indicated that in terms of both reskilling the organisation and ramping up the numbers, SEBI has been active, especially in the recent past. With complex products and expanded markets, reskilling and reinventing the organisation will always be work-in-progress.
You introduced the concept of disgorgement of ill-gotten gains, where SEBI takes money from wrongdoers and pays back investors. Has the concept gone for a toss now?
I have not kept track of whether disgorgement is being resorted to as often as it should. Disgorgement of unjustly earned profits was introduced during my time at SEBI, even in the absence of a legislative backing for disgorgements, and I would like to believe that it was a pro-investor move, which acted as a deterrent to those attempting to game the system.
The finance minister has announced rewriting of securities code. You think SEBI needs radical changes?
I am not in favour of radical, and possibly disruptive, changes in a regulatory organisation. The changes cannot be of an incremental nature. What I would like to see, on a consistent basis, is functional autonomy being exercised, without fear or favour, and systemic problems, rather than transactional problems, getting priority attention. The proposal to bring all securities laws under one umbrella, and revisiting several norms, is welcome. The different laws that apply to the securities markets came into being at different points of time to address different sets of issues and institutions. While combining them into one major legislation would be a positive development, it is more important to concurrently weed out the provisions that have become irrelevant over time. I had separately recommended that there should be a Regulation Review Authority that deals with the stock element of regulations, and takes out those regulations that are past their sell by date.
Overall, are big corporates in India in compliance with the corporate governance requirements or are there gaps?
Generally speaking, corporates, both big and small, are fully aware of the compliance requirements, as well as the philosophy of good governance. However, the journey from awareness to adoption of good practices has not been uniform. There are still some companies that look at compliance as an unavoidable nuisance, and some others who look at governance as a cost, and not as an investment. Recently, moves by the Government, both in regard to decriminalisation of a number of offences under the Companies Act, 2013, as well as the stated intent to significantly reduce the number of compliances, should create an atmosphere in which more corporate entities readily comply with the requirements of law and regulation.
How can independent directors (IDs) be made more accountable?
It must be remembered that even in the universe of minority shareholders, there could be large institutional investors, whose preferences will manifest themselves as the views of minority shareholders. As for making the office of IDs more accountable, I believe that we are in danger of prescribing treatment without understanding the ground realities and boardroom situations. An increasing number of IDs are raising questions which management might find prima-facie uncomfortable, but are value-adding as far as the company and its stakeholders are concerned. Ensuring that only the right IDs continue to occupy Board positions is best attempted by a robust no-holds-barred evaluation that identifies the non-performers, and nudges them towards the exit door.
Your report suggests that a number of companies have not met the corporate governance norms prescribed by law. Yet, these companies have not been penalised by SEBI.
The Excellence Enablers’ Survey on Corporate Governance which captures the various aspects of implementation of Corporate Governance by Nifty 50 companies as on 31 st March, 2020, brings out a few instances of non-compliance. What it highlights are the practices followed by different companies in that universe, in the expectation that other companies will identify where they are falling short, and take appropriate corrective steps. For historical reasons, a number of companies have had the same individual functioning as the Chairman and the Managing Director. SEBI’s original proposal was that these responsibilities should be divided among two individuals as on 1st April, 2020. With the date having been moved by 2 years, it is expected that many companies would have got started on the process of identifying the best manner in which to comply with this requirement, unless of course they live in the hope that it would be further extended.
How does having geographical diversity on the board help improve corporate governance?
For some time, diversity in Indian boardrooms has remained confined to gender diversity. With more Indian companies having a global presence, it is necessary to capture the experience of jurisdictions outside India, and hence companies are inducting foreigners, including those of Indian origin, as members of the Board.
Your report highlights the attendance problem in board meetings. Should such Directors and IDs, who do not attend Board meetings be blacklisted?
Attendance at Board meetings is an area which cries out for considerable improvement. There should be stringent provisions to point habitually absentee Directors towards the exit door, and to make it clear in the Stock Exchange filings that the person has ceased to be a Director on account of an unsatisfactory attendance record.
Companies are complying with the requirements of the audit committee yet we see many cases of frauds and non compliance rising. Should the law focus on the quality of the audit committee instead of just numbers? Should risk management committees (RMCs) be given statutory recognition, in addition to regulatory recognition?
The Audit Committee is a very important. It is my belief that it should have a minimum of four members. More importantly, these members should be persons with reasonable knowledge of, and exposure to finance, even if they are not finance professionals. Risk management will gain its legitimate place in the pecking order, if the RMC is given statutory recognition, by making it a mandatory committee under the Companies Act, 2013. While there can be no standard formula as to how many IDs should be in the RMC, it needs to be recognised that the presence of one or two IDs in that committee will help the committee to gain an additional perspective on the risks that reside in the external environment.
Is shareholder activism a risk to companies as your report highlighted growing instances?
I do not believe that shareholder activism should be identified as a risk. Clearly, the expectation cannot be that shareholders would be passive. What I am against, and am afraid of, is activism becoming adventurism, and hijacking the company and the interest of its stakeholders.
Most companies are appointing their friends, or distant female family members to comply with the norm on women directors. Should there be a qualitative check on this parameter?
With the provision of having at least one woman ID on the Board, the earlier practice of appointing only family members is a matter of the past. However, this should not be interpreted to mean that women members of the family are not equipped on their own merit to be Directors on corporate Boards.