Governance failures

The chairman’s message on the website of Hindustan Powerprojects (earlier Moser Baer Projects) reads as follows: “Our strategy of risk-mitigated approach along with the pursuit to comply with all applicable corporate governance regulations has allowed us to ramp up our operations.” This may however, sound like a joke now, as the chairman, 42-year-old Ratul Puri, has been arrested by the enforcement directorate because of a Rs 354 crore bank fraud case filed by one of his lenders.

Though the charges are yet to be proved, they are serious enough. While declaring the Moser Baer account as fraud after a forensic audit, Central Bank of India claimed that the company and its directors forged and fabricated documents to induce the bank to release funds. More problems seem to be in store for Puri who is also being probed in the AgustaWestland chopper scam. Though the bank fraud case has been going on for a few years now, those who know Puri well say, they are surprised that a man who is polite to a fault and keeps chanting the corporate governance mantra has so many skeletons in his cupboard.

In fact, corporate governance has been a big casualty this week. A financial fraud worth thousands of crores was detected at the Gautam Thapar-promoted CG Power and Industrial Solutions on Tuesday. The company disclosed that the total liabilities were potentially understated and that certain assets of the company were purportedly provided as collateral without due authority. While the probe report did not specifically say, money was diverted through shell companies, several companies set up by former employees were under the scanner. This has been going on for quite some time, raising questions about the role played by the board, especially its independent directors who were silent when these questionable deals were going on.

These two cases are the latest in a growing list of frauds in India Inc. In May this year, Vadodara-based Manpasand Beverages, which was already at the centre of a controversy after Deloitte resigned as its auditor last year, found itself in the spotlight for all the wrong reasons. The company’s MD, his brother and the chief financial officer were arrested for Rs 40 crore goods and services tax (GST) fraud. The other directors of the company predictably resigned claiming they had no knowledge about the fake transactions.

Governance has been a serious concern in Indian companies (mostly family-owned) because of their practice of appointing the same individuals as “independent” directors on multiple boards within the same family conglomerate, many for an extended period of time. An MSCI report said, “this raises concerns as to their ability to adequately represent the interests of minority shareholders. A concern is that the lack of diversity of experience and background represents a major area of weakness for these boards.” Many of these companies have also adopted complex ownership structures such as stock pyramids and cross shareholdings as they seek to maintain family control. Naturally, governance becomes the least priority.

Part of the problem of appointing independent directors close to the promoters will,  hopefully, be resolved by the market regulator’s recent diktat that they will need to fulfil more criteria to be eligible to sit on boards, while audit, nomination, risk management and remuneration committees will play a bigger role. The Securities and Exchange Board of India has also ruled out a minimum compensation for independent directors but said that the expertise of directors must be spelt out.

While independent directors are not supposed to know everything that the promoters are doing, the fact is most of them perform the role of nodding whenever the chairman says anything. A vast majority are people conditioned by culture — the culture of not expressing dissent very forcefully — and are therefore, intimidated or unsure how their criticism will be taken. Directors close to promoters want to be viewed by the controlling shareholders as flexible and cooperative rather than rigorous or principled.

Independent surveys have found that only one out of five companies appraises the board's performance in India. The move towards board reviews has been relatively slow and there continues to be some resistance by older or more senior directors, in particular, to the idea of individual director appraisals.

Some of the performance indicators on which the independent directors must be evaluated are their ability to contribute to and monitor the company's corporate governance practices, active participation in long-term strategic planning, and commitment to the fulfilment of a director’s obligations and fiduciary responsibilities.

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