Capital Market Regulation and Corporate Governance -Mr. Anurag Goel Secretary, Ministry of Corporate Affairs, Government of India & Chairman, Board of Trustees, NFCG

I am very fortunate that while discussing an important subject such as the linkage between capital market regulation and corporate governance, I have two masters with whom I am sharing the dais. One is the master of capital market regulation, Mr Damodaran and the other is, of course, the master of corporate governance in its wider sense Dr Irani. I have shared several boards including SEBI with Mr Damodaran for more than 4 years a part from sharing a friendship that goes back to 30 years. With Dr Irani I have a very different relationship. I am trying to implement a task that he set up for the ministry. I thought I would meet Dr Irani after completing the task and that is why I met him today for the first time. I am in a happy position to tell you that, notwithstanding for over 16 months taken for the drafting, vetting of the new Company Law, all that fortunately is almost done, and by next week we will be through. On the monsoon session the new bill will be introduced in the Parliament and many of the issues, which have been raised today, including some Mr. Damodaran specifically directed at the ministry, will be answered there. The bill was a wide canvass on many of the issues on which we share common concern.

I must tell you that I always enjoyed being the last speaker. The reason is that by the time your turn comes to speak everything that is to be said has already been said. Nobody is expecting anything new especially when you have the panel like the one you have here. This gives me tremendous freedom. I can choose to say and pick up any thoughts that I want to and I thought I will just pick upon two thoughts in today's context- (1) New dimensions are being added to corporate governance. (2) We all seem to know what needs to be done, and how to go about doing it. Mr. Damodaran has already shown a way forward. But before I add to that, I must recall that Dr Irani's task is something which I had not foreseen and he spoke about the new role of the ministry and the vision of the ministry and this is a subject which is very close to my heart. I must take this opportunity to share with you what in my perception this ministry is trying to do. I think and I am saying it because of the genuine feeling, in the last few years ever since it became a ministry in its own right, what we have been able to do and are attempting to do, has perhaps not been done in the last two decades. We have also crystallized for ourselves a clear statement of our vision as to what it is that we want to do. I will give you the vision: "To be a leader and a partner in initiatives for corporate reforms, good corporate governance and enlightened regulation with a view to promote and facilitate effective corporate functioning and investor protection". This ministry today believes that the two basic outcomes that we are looking for, working for all the time is effective corporate functioning on the one hand and investor protection on the other hand and the two obviously work together.

MCA 21, I am told that in international fora and all over people say it is amazing, how could you do it. A minister in the UK told my minister, we have been at it for 6 years and we have got 40% e-filings, how you got it to 100%? A survey by CNBC of CEOs and CFOs said that 92% of them found it to be a revolutionary e-governance initiative and it should be more like that. MCA 21 is something which all of you are aware of.

The Bill for Limited Liability Partnership has gone the rounds of Parliamentary committee and all that over the last one and half years. We moved notice for introduction in the Rajya Sabha in the first week of May, which unfortunately was adjourned sine die. We are sure that it will come in the monsoon session.

Accounting standards were notified in December 2006 and after the crisis that we have been having the last two months, people have started to understand much more the importance of the accounting standards. We are now working towards convergence with international accounting standards and I already had meetings with David, Chairman of the International Accounting Standards Board and people from European Commission and others. We have amended the Acts of the three professional bodies ICAI, ICSI and the Cost and Works Institute. You are aware of the Investor Education and Protection Fund. Some effort has been made but this is an area we need to continue to do more and more work. Then there is the National Foundation for Corporate Governance (NFCG), which has organized this event, and Indian Institute of Corporate Affairs about which I will come a little later. But the purpose of all this is the ministry is working on a wide spectrum starting from legislative and policy framework to delivery system. I would like to tell all of you including Dr Irani that we are actively working at the system where there is a much greater certainty of law being applied.I know once that is done there will be reactions but we are quite ready for that.

Coming to the two points that I wanted to mention to this particular gathering - the new dimensions of corporate governance - I think basically I would have mentioned only two sides: the concerns arising out of the current world wide crisis in financial systems and structures. I think that is a major area, there are lot of issues there. I think NFCG would need to organize a separate full day workshop to really start looking at that. But that is something that we need to take in to account when we are talking of corporate governance over the next few years.

Second is, a very interesting thing which I have discovered that corporate social responsibility is apparently becoming more and more important within the overall corporate governance framework. Though I still have heard debates and people say that corporate governance is something different and corporate social responsibility is something different. All sorts of debates are going on but issues of equity and sustainability are certainly becoming more and more important considerations in corporate strategies. Boards are certainly seeing more and more role for themselves with respect to society and community and we all seem to be moving one step forward from the mantra of PPP - public private partnership to the fourth P saying people public private partnership. I think all around there is a lot of appreciation of the fact that this is bound to come. As a result of all these, what I seem to be seeing is that corporate social responsibility and inclusive growth have major overlaps. Corporate social responsibility and through that the corporate's role in ensuring inclusive growth for the country is becoming more and more important. In fact NFCG, my ministry and CII had organized a two-day summit in Delhi earlier this month and there appears to be a strong consensus. I heard the Chief Minister of Rajasthan, a number of MPs, people from all over the world and a huge number of representatives from the corporate sector, all seem to be talking of governance, not corporate governance. I see that trend happening and the reason is obvious. The Government is looking for more and more partnership with the private sector, with the professionals, with the experts, with the institutions. The role of the partners is increasing. These are the two things, which I want to briefly mention in terms of the canvass that corporate governance may cover over the coming years.

Way forward: If anything has to go forward, you need institutionalized systems in place, which work. Individuals however brilliant, leaders however charismatic cannot replace institutions. They need to be supported by institutional structures. They can put in place institutional structures but just as Damodaran was saying about the bathtub, baby and the water I think the same thing applies here. If you don’t have the institutional systems and backups, no amount of efforts will succeed. That is where I have two thoughts. First is the National Foundation for Corporate Governance (NFCG) as an existing structure. When I joined this ministry, for the first four months I spent a lot of time on NFCG. I made sure that the council has the minister as the chairman, Mr Narayana Murthy is the Vice Chairman and the Secretary of the Ministry is other Vice Chairman, it has Chairman, SEBI, Chairman, IREDA, Chairman of Indian Banks Association, president of CII, DG CII, President of ICSI, ICAI, Secretary ICSI, ICAI, Secretary DPE, Secretary banking on its board– it is a high power board. The board has a clear vision, but what I found over a period of time is that everybody seems to be doing his/her own thing in corporate governance. When you talk of corporate governance, different people have different definitions, everybody, every industry association, every corporate house everybody is doing a lot but I did not find a single place, which puts it all together. That is the role the board of NFCG saw for itself. It said that that NFCG should be a facilitator. It doesn't look at NFCG as the apex of corporate governance thing but as a great facilitator, as a clearing-house of information, as a facilitator of having a shared vision and to make sure that the efforts are aligned to each other.The difference between iron and magnet is only the alignment, which converts iron into magnet. That is one institutional structure, which is in place. I would request all of you to make use of NFCG a little more in institutional sense.

The other thing is an institute which has been approved by the Cabinet earlier this month, which the ministry is setting up: the Indian Institute of Corporate AffairsThis institute has taken shape because we felt that the ministry to actualize and operationalise the vision it set for itself needs institutional support and this institution is the result of this. I would not take much more time to explain what it is but let me just say that this is going to be a very strong platform for corporates, governments and professionals to work together on all issues that impact on corporate functioning. We are in the process of crystallizing the vision. But let me give you two of the many possible formulations. One is to redefine the corporate landscape in India.This may sound ambitious but these are the kind of thoughts which are running in our mind to redefine the corporate landscape in India for thriving on future shocks through ethical, sustainable, competitive business strategies with corporates and government working in partnership for inclusive growth and global fitment. The another formulation is a holistic think tank, capacity building, service delivery institute - to help corporate growth reforms and regulation; to synergize knowledge management and partnership; and problem solving in a one stop shop mode.There are many other things that we want to do. The ministry is in the process of setting up this institute and would be quite happy to welcome your ideas on this and to partner with any or all of you in taking this forward.

Let me end by complimenting Rajesh and his team on organizing this event and I would like to thank all of you for your participation.

Let me attempt to field some of those sixes in the course of a few observations.

Firstly, I compliment NFCG for the outstanding work it has done. I think it is a unique initiative with a great organization that brings together not just the administrative Ministry but those that are tasked to deal with running companies, which is what the CII's do, the accounting firms, the company secretaries. I did endear myself to that community by saying that you are like the opening batsman, you are the first line of defense as it were in the board room to see that right practices are put in place before the rest of the world gets to know about it. I think this organization bringing together all of these interest groups and working towards the common cause is a great initiative and clearly the results are beginning to show.

Two or three quick comments and these are broad spectrum comments and in that large canvass I will try and address some of the specific issues. Firstly, Indian multinationals, and while you need to have common code - desirable, but highly unlikely to happen given that corporate governance draws heavily from the culture of not just governments worldwide but countries and you have such wide variations If you look at the reports of the IOSCO website which attempts to capture the present corporate governance practices across developed and developing countries, you will find that there is an infinite variety in the practices Not just the structures, a mention was made on the continent as well as United States and it is not just rule based versus principle based. Look at one board versus two-tier boards in the continent and what that means for the way corporate governance practices play out. Look at the shareholding patterns, they are different. One set of jurisdictions and it is so wide spread you cannot identify a large shareholder within the company and yet somewhere else you do have large families that still run companies. I am not talking about developing countries; I am talking about developed countries. Given that infinite variety of playfield you cannot have, at least in the short term, a code that seeks to attain some degree of commonality. This is something that the regulatory community worldwide has recognized. Therefore, while you work towards chipping away the differences that are very significant, getting to a kind of commonality is going to take not just my lifetime but the lifetimes of the youngest of people in the audiences. Hopefully we will move in that direction but I don't see it happening too soon. This is inform by culture. Just to give you one example, I just want to touch on the principle based versus rule based. I don't know why we say versus. I think because the British ran this country for several years, we have developed a way of looking at a relationship between any two individuals, any two organizations as a necessarily adversarial relationship unless the contrary is being proved. We never play with people; we play against people all the time. Why can’t you have rules that are founded on principles ? There is a point of time at which you would need rules to be written out. Could we have run this country given its diversity without a written Constitution amended? Britain runs reasonably well without a written constitution. Now to say that you can take that kind of a practice, look at the law of privileges which was recently discussed. They can manage very well without having an elaborate codified set of privileges. We believe that what was a set of privileges when the Indian constitution came into being as applicable to Great Britain is what ought to be frozen for the Indian parliamentarians. Britain has moved on. You really can't compare jurisdictions. There is nothing called best practices and this is an unfortunate truth. If you recognize this, and Mr. Mukherjee made a valiant attempt to define corporate governance. I said valiant attempt because it is not something that you need to define. Several people in India, Cadbury included, have attempted to define it. We can look within this country and find much better explanation, much better indications of what this means. If you look at what Narayana Murthy said in the report that he gave to SEBI based on which clause 49 was drafted, he said that management is about running companies; governance is about running them well. I don't think that you need to say too much more than that. Or as I am fond of saying, maybe as you get older you start thinking of Mahatma Gandhi etc. Mahatma Gandhi. said long years ago, not in the context of corporate governance because it wasn't fashionable when he was alive. He said that the ends do not justify the means and he also said that business is trusteeship. I wanted to read both these together and I advocated. Read both these together and see therein lies the seeds of what is good corporate governance. Let us not get into modern definitions that seek to confine the concept rather than to liberate it. It ought to be undefined because to define is to limit.

Self-governance is the best governance is one of the points that was raised. I don't know whether we would want tomorrow to withdraw the entire police force from Mumbai and leave Mumbai to be self governed in the matter of law and order on crime. Imagine, I can't visualize a prospect of that kind but do that. This country, for whatever reasons, I know it is not a hugely a positive statement to make needs to have, and this is again something that is drawn from culture, needs to have things written out. Those of you who are heads of companies, ask your compliance officers whether they are happy with principles base regulation or they want rules to be written out. If someone asks the question, it is the compliance officer that has to come up with an answer and he or she is going to say, unless it is written out clearly I don't know whether I am on the right side or the wrong side of the regulation. Principles base is fine. Don't see it as being opposed to rules based regulation.

I want to give you an example that long years ago when I was a young man, in a railway station in that town some gentle man who thought he needed to find out if how honest an average Indian was left newspapers on a railway platform. There was no one selling them. You could deposit the money in a box and take up the newspaper you wanted and get into the train. This was the facility meant for passengers that came in the 15 minutes or so, when the train must have halted. On the first day the collections were significantly in excess of the value of newspapers. Those days the paper used to cost less than a rupee, you don’t have change and you drop the rupee coin or whatever. That is the country that you are talking about. There is no getting away from the truth. Therefore while it is fine to talk in terms of regulating ourselves, all of these are very good things. I am not saying that this is a bad thing. Will we get there in the short run ? is something that you need to ask yourselves.

Creating meaningful boards was mentioned. Shiril said that it is easier said than done. I want to touch on one thing which I think this organization, NFCG and I am appealing to Mr Goel to do this because he and his ministry need to lead this effort. When you go out and try and get good directors they are always asking questions. I am sure there are people in the audience that are asking these questions: what is the extent of my liability for things that I don't know happen in the company on whose boards I am. Take Section 138, easily the best section which best illustrates this. Four Supreme Court judgments, if I am not wrong in the last two years. Do they all say the same thing? Do you or I know as an independent director on the board if a branch manager issues a cheque somewhere whether we ought to figure in that roll call of honor, called the list of accused persons in the case under section 138. Even the latest judgment a week ago, two judges were taking different positions. It is in this kind of environment you are inviting eminent men and women saying please come and join the boards, add value to the boards and they say why is it that we are going to buy trouble. Let’s stay outside the boards. Insurance is only part of the answer. Insurance is at the time of payment. The embarrassment that you go through, the difficulty and all of that are not addressed by insurance. I think what needs to be done is to create an environment. The laws are clear and what I think the Irani committee recommended that the knowledge test is to be quickly brought into Legislation to see that the directors are held responsible only for those matters which they are supposed to know as directors and not for something that happens at a branch level or something of that kind.

Too much data is as bad as no data. What is data, what is information, what is knowledge, what is wisdom-all of these are different. Sometimes we tend to treat all of these as same. Data overkill might compete with diabetes as the major killer in India in the 21^st century. You have much more than what you need on your plate and yet if you discontinue providing any of that you will have to get back to the context in which it was introduced. Long years ago, those of you who are old policy holders of Life Insurance Corporation might remember that one Minister made a bold statement: I will reduce the policy to one side or one page. Will your lawyers in your companies allow you to do that? Will there not be adequate disclaimers that far exceed that one page so that when payment time comes somebody tells you sorry, you didn’t read the print here. The point that I am trying to make is that documents get bigger allegedly in the interest of those that are suppose to read them but don't read them because they have got bigger. Therefore, sometimes solutions that seem less than the best, but are not necessarily bad solutions, are attempted. SEBI attempted something called the IPO grading which was trashed in the press and by all those who were knowledgeable because it sought (I am using words that Shiril used a little while ago) to summarize all of these in a manner that could be presented to the average investor but that got trashed and I think the investor will have to live with the much more information than he or she can digest.

Where does all of these take the corporate governance movement? We need to do 2 or 3 things. There has been, as rightly observed by Dr. Irani and by some of the other speakers, enough laws and enough regulations. Can we decide that enough is enough? We will not attempt in search of perfection, in search of the ultimate truth to make minor changes important though they might be because it is important that those who are dealing with this know what the state of the law is, what the state of the regulation is at a point of time. Shall we freeze on regulations and focus now on complying with those regulations incomplete as those might be and failing to address small issues as they might be? Let us put the focus now on compliance rather than on fine-tuning of regulation. That is something that I wanted to raise here.

Second is should we not de-mystify this entire concept of corporate governance? Should we not explain to people in very simple terms what it is then corporate governance stands for? What are the rights and duties of shareholders? Not just the right to ask question but the duty a shareholder owes himself or herself to ask questions. That is at the root of corporate governance. If that doesn't happen no matter what the prescriptive arrangement is it will not work.

Thirdly, you need to liberate corporate governance from the confines of board rooms. It is now being seen across India as something that is relevant within board room or at the board level. Governance is a set of good practices must inform decision making and action across organizations at various levels and not be confined to board rooms alone. I don’t want to expand on this. There are whole lot of thoughts one has but I am sure there will be opportunities going forward to do all of those things.

There was reference made to T-20. I have much more time than many of you have these days and have seen a lot of T-20 matches on television. I think one point that is coming out fairly clearly is that orthodox cricketing shots also yield results. You don't have to play across the line all the time in order to score runs or win matches. You can play within the wicket, keep your bat straight and yet make runs and I don't want to use this forum to give you examples of those, that I have done just that and made adequate number of runs. The point that I am trying to make is, whether companies over time have recognized that there is sustainable value for all stakeholders by companies following the best practices, doing the right things, doing it in the right manner. If that is something which has been established, that message needs to get across. You don't have to skirt the provision of laws, rules, regulations; you don't have to abandon the highway and take the shortcuts unpaved as they might be in search of short term gains which might be inconsistent with long term organizational goals.

I was happy to hear that institutional investors look at governance practices. Mr. Mukherjee spoke of corporate governance premium and corporate governance discounts. I am not so sure whether Indian investors individual or institutional and that is the tragedy, when they invest, attach the kind of importance to corporate governance that they ought to be attaching to corporate governance. I will give you two examples. Take our oil companies. I think there is some mention in the newspapers today, I have been agonizing for this publicly and privately over time. Have we heard of independent directors on the board of oil companies recording their dissents at least in the board rooms? Today there is a fairly clear indication in one of the articles in the newspapers - who is picking up the bills - part of it the shareholders, part of it is the taxpayers. There are eminent men and women who are independent directors in those companies, have they asked the right question? More importantly investors that have invested in those companies, have you heard them asking any questions? It is their money that is invested there. There are large institutional investors, Indian and foreign who have invested in some those companies. Have you heard them asking what is happening to those companies, what is happening to governance, what is happening to shareholder value, other stakeholder value etc.? We haven't heard. The second example is, the public sector bank boards. You occasionally hear that public sector banks are board run entities. Isn't it now becoming a pattern that when the governor of the Reserve Bank makes his policy statement with the required periodicity all bankers congregated to Delhi 2 or 3 days thereafter and emerging from discussions in Delhi announce what they are going to do with the interest rates. Are you reacting as bankers, professionally to the central bank's policy prescription or is there a governance issue because you are waiting for somebody else to tell you how to react. If that is the case what are the non-executive directors on those bank boards doing? Should they not be a part of the decision making process? I have only given you two examples that I know. There must be I am sure several others that we can think about it. So it is not about whether prescriptive practices are good or bad. There ought to be prescription because if you compare what happens in medical science, all of us fall ill unfortunately at different points of time, the sequence is diagnosis, prescription, treatment. You can't skip prescriptions. If you don't have the prescription, you will not have treatment. You cannot jump to treatment without diagnosis and prescription. You will look at what the problems are, you will put in place a prescriptive arrangement and then deal with what happens if that prescription is not acted on by somebody that needs to act on it. When we look at the inadequacies of the prescriptive arrangement being put in place, I think we need to recognize that this is a necessary condition, not a sufficient condition. A prescriptive arrangement, an exercise of box ticking, is not going to lead automatically to good governance practices but is that starting point of the journey towards discovering good governance practices. Therefore, there is no getting away from the box ticking if the journey that you have embarked on is good governance practices. It is the minimum kind of a requirement. What needs to be done going forward I think is for a nationwide campaign to educate investors and this is something that the ministry of corporate affairs is looking at through the fund that it has. A nationwide campaign to tell investors that it is your money, somebody persuaded you to part with that money in search of some dream she or he might have had so that you might prosper together. Therefore, so long as it is your money ask the questions that you are facilitated to ask by prescriptive arrangements that are put in place. It is only facilitation; it is not the whole story. It is a prompter. It tells you what kind of questions you ought to ask but not a replacement for your asking the questions as people who have parted with their money when you read those prospectuses and you are suitably impressed by whatever was put out in those prospectuses.

I think it is very important if we are looking at sustainable development of Indian companies, of Indian multinationals of Indian markets to demonstrate over time and I believe we have the capability to do it that governance pays in the long run and that this country has the ability and the will to ensure that not just the best companies but even with the worst company's to begin to subscribe to corporate governance practice

The last thought I want to share with you is this: we heard it mentioned here that the market tends to reward companies that practice good governance, other things remaining the same. There have been studies carried out in other countries to demonstrate that corporate governance adds value. No studies, I believe, no detailed studies have been made in India and therefore, if it is our belief that governance actually leads to value enhancement, let us document those, let the NFCG works towards putting in place a study that documents a positive correlation between good governance and value to all manner of stakeholders. Because if that happens that is going to help spread the message far more than any one saying that it ought o lead to better value. Let us demonstrate that it does.

All that I want to share with you is this: inadequate as a prescriptive arrangement might be, don't throw it out of the window. It is easy to do that. If you throw out whatever prescriptive arrangement is in place and think that corporate governance will come on its own it is not just the baby that is getting thrown out it is the bath tub itself that is getting thrown out along with the baby. There will be no market left after that. There will be no investors and we can discuss corporate governance. Let us not do that. Instead let us create the climate in which good governance is de-mystified and demonstrated to be of value to all manner of stakeholders as possible. It is not something we should shy away from.

I want to remind you of one unfortunate truth. Some of you might have heard maybe 10 or 12 years ago something which was fashionable at that time, the citizen's charter, I am sure some of you heard about that, something that was there in the UK and the government in India thought that it was good and we must have. If you go to a bank branch you have the right as the customer to know in how many minutes you can get a demand draft or in how many minutes your cheque will be encashed, etc. This was the citizen calling the shots. I don't know when is the last time we heard about the citizen's charter in this country. I think it has been confined to history now. Do we want that happens to corporate governance 10 years from now? If we don’t want that to happen I think we must recognize the limitations of what is today in place and work towards improving rather than try and take it apart and say that this is no good. I want to emphasize whatever is in place. Please see that as a necessary condition; it might not be a sufficient condition. The fact that is insufficient does not make it unnecessary.