Retail investors are shying away from equity markets and that's not good news. Apart from poor returns generated by equities over last 5-6 years, quality of corporate governance in many Indian companies has been putting off retail investors. When you buy a stock, you are bullish on the underlying business; so indirectly you also trust the ability of people running the business. If something separates good companies from the poorly managed ones, it is quality of corporate governance. In simple words, corporate governance means, set of rules, systems and processes governing a company. Any corporate decision is affected by corporate governance practices and almost all business decisions may reflect quality of corporate governance. Securities and Exchange Board of India (SEBI) is soon expected to come out with new corporate governance code and also brush up insider trading norms.

Background...

It is believed that, strong corporate governance is necessary for robust capital markets. Although companies act 1956 laid down foundation of basic framework for regulating companies, it has limited provisions to ensure good corporate governance. Kumar Mangalam Birla Committee on corporate governance in 1999 attempted to develop first formal code of corporate governance in India. The committee was of the view that, any code of corporate governance code must be dynamic, evolving and thus should change with changing context and times. Enron and Worldcom were the corporate governance disasters. In Indian context, it was observed that, some companies followed world class corporate governance but there were many more companies which followed poor corporate governance practices. It was thus felt that there was a need for taking corporate governance standards to next level. Committee headed by Mr. NR Narayan Murthy suggested some revisions. However, even at present the issues pertaining to corporate governance haunt Indian capital markets. In the recent times, Ministry of Corporate Affairs had appointed a committee under Mr. Adi Godrej for articulating a policy document on corporate governance. The new corporate governance rules are being introduced after taking into consideration public remarks on draft corporate governance norms released by SEBI earlier.

Some key provisions under new code....

• All listed companies will have to justify salaries of high executives
• It will also be mandatory on companies to make disclosure of ratio in which each of the directors is remunerated as compared to their staff
• Companies, henceforth, will have to lay in succession plan
• Companies will have to adopt whistle blower policies
• There would also be restriction on the number of directorships a person can hold
• Henceforth, indulgence in unlawful insider's trading activities would attract more severe punishments
• The applicability of prohibition of insider's trading rules has been made more comprehensive as more categories of people have been brought under the purview
  
  

Under new regime, it is also proposed that companies should be rated by independent rating agencies for their level of compliance. This should be done in addition to independent inspection by SEBI as well as stock exchanges.

PersonalFN believes that introduction of new guidelines are consistent with an attempt of SEBI to constantly improve the corporate governance standards in India. Even today, many Indian companies are exploiting loopholes in law and indulging in unfair practices. Satyam Scam has been one of the most prominent examples in the recent times. Furthermore, many Indian companies are still run by families and succession often involves family feuds. If the company management is dominated by a particular group or a family, on numerous occasions, interest of minority shareholders gets compromised. Besides this, many stocks exhibit violent price fluctuations due to insider trading activities. PersonalFN believes that new set of guidelines would make retail equity investors well-equipped to understand the level of corporate governance of a particular company before investing in it. In case of mutual funds too, those investing in companies with good corporate governance, tend to perform well in the long run. Having said this, PersonalFN believes implementation of rules and policies ensuring compliance by the companies would be the key factor.

So next time, don't forget to see the corporate governance rating of the company before putting your money in it. You may look for companies which show accountability even towards the minority shareholders and recognise their responsibility towards all stakeholders.

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