Corporate Governance in India's Financial Sector Discussed By SPJIMR's Centre for Financial Studies

The Centre for Financial Studies (CFS) of Bharatiya Vidya Bhavan's SPJIMR, a top-ranked management institute in collaboration with the Public Relations Society of India (PRSI) - Mumbai Chapter organized a webinar on "Corporate Governance and India's Financial Sector", today.

Mr. Amit Tandon - MD and Founder, Institutional Investor Advisory Services - IIAS, Mr. Sandeep Hasurkar - Investment Banker and Author and Mr. Tamal Bandyopadhyay, Consulting Editor - Business Standard and Author were the speakers of the session which was moderated by Prof. Ananth Narayan, Associate Professor-Finance, SPJIMR.

The discussion began with Mr. Hasurkar, highlighting the interconnection between the real economy and the financial economy. He mentioned three factors explaining the nuances of this interconnection via the IL&FS story. "One was Management ambition. The second aspect of it is the nature of financing that was undertaken and comprised of two things on a larger system basis: a) India does not have a risk appetite. That is something we have known about for more than five decades now. The structure that was invented was a cat's paw. It was unfortunately not supervised, kept controlled, and limited and it became a Frankenstein monster. b) The asset-liability mismatch. You don't have adequate tenure of funds to lend to infrastructure projects. The third part is the real economy part which is what is happening on the ground. In the second tenure of the previous government, there were huge allegations of scams, there was a judicial intervention and the whole system went into paralysis. The government goes into hibernation, but the private sector is caught in a trishanku where it will essentially bleed, scramble around, try to get funds and it will eventually default and die."

Carrying the conversation forward, Mr. Bandyopadhyay shed light on the idea of the letter of the law versus the spirit of the law. "Corporate governance is like driving a car. I stop at the green light for the pedestrians. I may not stop also as I would want to get the split seconds between the amber and the red light, and I use that opportunity to get out. Or, even if it is red, I will drive through. So, there are two extremes, one is the green light and I stop and the other is the red light but I drive through. So, I am not respecting the green light, I am respecting my conscience. I can go ahead, but I will not go, because there may be an accident and some lives will be lost. This last category, green light but I am not going through is what corporate governance actually is."

Typing up compliance and its relationship with governance, Mr. Tandon mentioned that there is a greater emphasis on compliance and checking the boxes. The overarching sense is that this operational efficiency camouflages the governance issues and oversights of the bank. He explained that the problem of the regulators failing to see the big picture and getting involved in the details is the reason why there is a compliance mindset, resulting in weak governance.

Further, bringing in the IL&FS analogy again in terms of governance, Prof. Narayan put forth a question in respect to the silence maintained by various parties before the crisis, even though it was foreseeable. This was explained by Mr. Tandon as the crowd mindset. "Other banks are continuing to lend, the auditors are giving a clean chit, the rating agencies are continuing to give the desired ratings, mutual funds are continuing to lend. Each person was looking over their shoulder and seeing that there is someone else, and counting on the other party to have done the due diligence."

The next leg of the discussion was on the emphasis that the companies need to place on the skillset of the board members. It was highlighted that it would be desirable to have an individual with prior experience in the same domain as the company since it would invite better questions, provide deeper analysis, and appropriate guidance. Along with this expertise, another strong component of corporate governance is the need to have members who bring independent weight to the board. Mr. Hasurkar added, "When Mr. Vaghul was the chairman of ICICI, the board had Mr. Ashok Ganguly, Marty Subramaniam, it had a lot of people who brought independent weight to that board. There is a presence, a behavioural aspect which is a very strong component of corporate governance."

Adding to the above factors, the impact of the changing account standards and the bearing it has on the auditors was also highlighted. The shift from true and fair accounting, to fair value accounting, has forced the auditors to rely on the estimates of the management. The need to have the traditional accounting system for the banking sector was emphasised upon.

Further, discussing the resources needed to become a US$ 5 trillion economy, Mr. Tandon commented, "There are too few banks in India, you can count on about 22-23 banks but it is not sufficient to either enable our corporations to grow or for the economy to grow. So, we need many more banks." Adding to this, Mr. Hasurkar emphasized the need for transparency "In the case of IL&FS, the SFIO had made a recommendation saying that RBI constitutes an internal committee and reports on the matter. There has been no action or even if there is action there has been no reporting done. I see no reason why that should not be brought out in terms of public transparency. Regulators, like the judiciary, are the critical components of the system which keep the system stable but a certain degree of public transparency and reasonable accountability is essential for its functioning to be in consonance with what its mandate is." Further, emphasising the need for an ownership neutral regulation, Mr. Bandyopadhyay added, "You still have a large banking system owned by the government and they are also a problem because our regulation is not ownership neutral and that is also a governance issue. Regulations should be ownership neutral. We have been hearing that the government is now talking about running the banks as business enterprises, and no more as a socio-political instrument. That is very critical from the governance point of view."

Lastly, it was concluded by the panel that things are going in a positive direction, given the change in the way of operation of various agencies, the foreseeable goodwill, and the intent, but there is a need for a far greater speed.