Can Corporate Governance Change in 2018?

Indian companies have just been through a tumultuous year. Will this help us cleanse the system for a better tomorrow?

Another year has arrived, replacing the old with the transformational new. Many of us have undertaken fresh resolutions to make a new beginning and to turn things around. Among the many challenges to resolve in this new year is one crucial one — how to change the business-world mindset to enhancing ethics instead of earnings or vice versa

2017: year that was

The issue of corporate governance played out quite differently in India in the year just gone by. Some flag bearers of good corporate governance did not depict themselves in proper light.

To take one instance, Infosys, the Indian IT giant, filed a consent plea with SEBI without prior notice for probing the company’s decision to give a generous severance package to its former CFO Rajiv Bansal – a move that drew the ire of many. If everything was above board, why then the consent plea move? It defies logic.

Bank managers were taken severely to task for sanctioning loans which remained unpaid. The Central Bureau of Investigation (CBI) arrested former IDBI Bank Chairman, Yogesh Agarwal and four of his erstwhile colleagues. Others who were arrested included the-then-CFO of Kingfisher Airlines and three other functionaries of the airline, in connection with a Rs 900-crore loan default. Bankers cannot decouple themselves anymore from possible poor decisions.

In a separate case, smart phones provided general public with smart ‘insider information’ for making some fast buck on stocks. WhatsApp messages proliferated giving ‘results-related’ data ahead of official corporate announcements. A case in point was Axis Bank’s June quarter results. It officially declared its accounts in the evening, which were found rather identical to those forwarded through WhatsApp earlier in the morning!

Corporate frauds too kept happening. In case of copier-maker Ricoh India, frauds committed earlier came to public light. It was alleged that its CEO and CFO falsified accounts in a major way. Further, banks lost a whopping Rs 17,000 crores in fiscal year 2016-17 due to various frauds.

There does not seem to be any let-up in corporate malpractices.

The finance team will need to be aware of this wider definition of related-parties, and take care to obtain prior board approvals. This is just an example how in the near future, the amendments to legislations may entail stricter implementation of corporate governance in India. And this is a good news.

2018: year that can be

Let me now gaze into the crystal ball to see what we can expect in the near future from the Indian corporate world in terms of ethical practice. Should the CFOs and the finance folks take more precautions? Will the Indian scenario of corporate governance change?

Based on the developments in 2017, I see certain broad emerging trends in Indian corporate governance.

Loan defaulters will be hounded more seriously, with threats to take over their assets. Thousands of petitions have already been filed with the appropriate courts to declare the defaulters insolvent. The national bankruptcy tribunal, National Company Law Tribunal (NCLT) is expected to issue orders which could be turning points for the Indian industry.

Some loans will get converted to equity, leading to change in ownership. Some assets would be sold off to repay creditors. But the most significant issue would be the findings of forensic audits.

More and more companies with stressed assets, will undergo forensic tests. And serious negative findings could see management and the owners behind bars. Hence, the finance teams need to suitably address very seriously any unethical practices carried out in the past.

As and when management change takes place in the loan-distressed companies, past practices of money laundering, fraudulent accounting or incorrect disclosures could come to light. Such information, if available in the public domain, could seriously endanger corporate goodwill. And I foresee this happening.

The Companies Act 2013 as such has made the role of directors especially the independent ones, tougher. Its subsequent amendments including the ones in 2017 have made things firmer.

For instance, apart from holding and subsidiary companies, ‘related parties’ will now include the investing company, whose investment would result in the invested-company becoming an ‘associate company’. And more importantly, the associate company will now be the one over which significant influence can be exercised, even when there is minority voting power.

The finance team will need to be aware of this wider definition of related-parties, and take care to obtain prior board approvals. This is just an example how in the near future, the amendments to legislations may entail stricter implementation of corporate governance in India. And this is a good news.

As we get more interconnected through computers and web, we will get more vulnerable to cybercrime. Please note that everything is hackable – even the advanced systems in driverless cars of the future could be hacked to make it one of the riskiest development which many auto-giants are working on.

At the grass-root level, credit card frauds may keep growing and our bank accounts may keep getting riskier. Unless we are very careful, 2018 may become a paradise for the cyber-fraudsters.

Contrary to popular belief, most corporate frauds are not detected by auditors, but are identified through whistle-blowers. I expect this trend to enhance. Though in India, adequate whistleblower protection and rewards are lacking, recent trends are showing encouraging signs of brave-hearts squealing for the common good.

Will things get better?

In the realm of ethics, things are unlikely to get significantly better in corporate management. The greed of entrepreneurs and the management in certain sections is unlikely to diminish.

However, tougher regulatory frameworks and the probability of harsh actions against the recalcitrant should put some brakes. This means that the finance folks need to be more careful in managing their affairs.

The positive news is that some green shoots are in the making. In a recent 2017 E&Y Fraud Survey, 52% of the respondents (as against 47% in 2015) in India felt that recent regulations are having positive impact on corporate ethical behavior.

Looking at the near future, I foresee more news and coverage on corporate behaviors highlighting misdemeanors. It should help to cleanse the system a bit. But I do not expect a complete rinsing. Challenging times in the ethical domain will continue to throw interesting stories!

 

This article was originally published on ET CFO.

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