After the Satyam fraud earlier this year, there was expectation of significant regulatory changes that strengthen corporate governance, disclosure and audit norms in India companies. Some changes did occur almost immediately; for instance, detailed measures were introduced favouring disclosure of pledges by promoters. However, the Companies Bill, 2009 introduced in Parliament a few weeks ago did not contain any changes from the previous version of the Bill as of last year. In one of the most significant changes post-Satyam, the SEBI Committee on Disclosures and Accounting Standards (SCODA) has issued a discussion paper containing some specific proposals that could result in changes to Clause 49 of the listing agreement. SEBI has invited comments, to be received by September 25, 2009.
The key recommendations (or proposals for discussion – as the SCODA appears to solicit views on certain issues without taking concrete positions) are as follows:
1. The appointment of the CFO is to be approved by the Audit Committee after assessing the qualifications, experience and background of the candidate. The SCODA did not find it necessary to prescribe particular professional qualifications for the CEO.
2. Rotation of audit partners every five years. The SCODA did not go down the path of insisting on rotation of audit firms.
3. Voluntary adoption of International Financial Reporting Standards (IFRS) by listed entities, so as to ensure a state of preparedness by 2011 when the Indian standards are expected to be converged with IFRS.
4. Interim disclosure of balance sheets (audited figures of major heads) on a half-yearly basis.
5. Streamlining of timelines for submission of various financial statements by listed entities as required under the listing agreement.
Some of the proposals (e.g. enhanced financial disclosures, audit partner rotation, etc.) appear to be similar to the changes introduced by Sarbanes-Oxley Act in the U.S. in 2002 in the aftermath of the Enron cohort of scandals. There continue to be questions about the workability of these proposals, particularly in the light of the significant increase in costs they bring about in doing business.
While increasing substantive checks and balances against corporate governance failures and corporate frauds would work, equally important emphasis ought to be placed on enforcement measures. The latter seems to be lacking to a large extent in Indian corporate governance. Wide measures will be taken seriously only if they are effectively implemented. The track-record with the implementation of Clause 49 has not been entirely promising. It has been found that a large percentage of companies are yet to comply even with existing requirements such as appointment of independent directors, and this includes several leading public-sector enterprises, which also received exoneration from SEBI for this failure. It has been reported that more than 1,000 companies had failed to file corporate governance reports as of September 30, 2008 and there is no evidence of concrete actions taken by SEBI for these violations. Despite detailed investigations by various authorities in relation to the Satyam fraud, any material outcome relating to the perpetrators of the fraud yet seems elusive.
Apart from substantive measures, there is need for proper enforcement by bringing offenders to book in a timely manner that may perhaps act as a deterrent and ensure wider compliance with norms.