Satyam scam: Regulation is better, but implementation has a long way to go

A string of regulatory changes since the Satyam scandal a decade ago has made the framework for handling such issues far stronger. But, structural issues remain, especially on implementation, which could affect how effective these regulations are, according to experts.

Changes include the fact that independent directors are more accountable than before, smaller shareholders have the ability to address wrongs through class action suits, disclosures have improved on pledging, whistle-blower mechanisms are in a better place and shareholder activism has helped make promoters more accountable. 

The board of directors, in particular, has been given a greater role in firms. 

“Be it the Companies Act, 2013 or Sebi’s (Securities and Exchange Board of India’s) listing norms, appropriate laws have been put in place to ensure the independence of independent directors and robust processes pertaining to their appointment and removal,” said Tejesh Chitlangi, senior partner at law firm, IC Universal Legal. 

The Companies Act also allows minority shareholders to appoint a director to represent them on the board, notes Sumit Agrawal, founder, RegStreet Law Advisors and a former Sebi officer.

However, implementation remains difficult with many independent directors not really free of the influence of promoters or powerful management, as has been seen in the case of lender Infrastructure Leasing & Financial Services (IL&FS), which faced troubles in recent times amid allegations of impropriety even with several well-known names as part of the board of directors. 

Shareholders can address such issues directly through the provision for class action suits. “Currently, there is a dedicated forum, that is, the NCLT (National Company Law Tribunal), which provides for the filing of class action suits, which was not the case when the Satyam episode took place. However, this section has only been notified in June 2016 and remains to be seen what impact it will have on shareholder activism,” said Agrawal.

Pledged shares that can give a sense of promoters’ liquidity issues require greater disclosures now.  But companies have got around it through innovative structures that allow them to park shares in companies and raise debt without having to make these disclosures. 

The introduction of proxy advisory firms has helped kindle shareholder activism. These firms, both foreign and domestic, advise voting on resolutions in a way that would best benefit shareholders. Many mutual funds and other institutions refer to them when it comes to voting on resolutions. 

Mutual fund voting patterns showed that they still abstain on roughly a tenth of resolutions and only oppose around 2 per cent of them, according to an earlier analysis of numbers from corporate tracker Prime Database. Some of this is because of the way resolutions are now dealt with. Companies often discuss resolutions in advance with proxy advisors or institutions to avoid embarrassment on voting day, thus keeping some check on promoter excesses.  

The fear of a whistle-blower helps. Companies have now set up whistle-blower mechanisms. But protections are scarce, and rewards are limited. Sebi is working on strengthening the whistle-blower mechanism, but it is unclear if it can provide reward or immunity in the near future. 
Some firms outsource whistle-blowing mechanisms to an independent, third-party organisation. The idea is to provide greater comfort that complaints will be assessed better. 

So, are these changes leading to a cleaner corporate India? The consensus among experts appears to be that regulation is better, but implementation may take a while to catch up. 

Vishesh C Chandiok, CEO, Grant Thornton India noted the recent progress notwithstanding, there is a need to strengthen regulatory capacity and to monitor such issues proactively. “Too often we need to clean the mess post an event, versus predicting it in advance. Penalties are sometimes too harsh and often too soft, and enforcement almost always is delayed by years,” he added.

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