December 31, 2022
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
Former ICICI Bank CEO and MD Chanda Kochhar and her husband Deepak were arrested by the Central Bureau of Investigation a few days ago in connection with irregularities in a Rs 3,250-crore loan to Videocon when she was heading the bank. Kochhar had resigned after the allegations gained momentum in 2018. Simply put, the case is that Kochhar facilitated the loan in return for which Videocon invested crores in NuPower Renewables, a company founded by her husband. The loan, part of a larger Rs 40,000-crore loan that Videocon got from a consortium of 20 banks led by the State Bank of India, became a non-performing asset for ICICI. The bank said Kochhar had violated its code of conduct and policies and that eventually led to Kochhar’s exit. The case has become emblematic of the grave concerns over corporate governance in India. Corporate governance matters, especially in banks but across all businesses, large and small, because ultimately it tells on the economy and everything that comprises it. How does it impact you? Let’s take the case of ICICI Bank and Chanda Kochhar. This money given to Videocon, which was never returned, belonged to account holders like you. Such decisions affect the security of your life savings, your earnings, money that you had put aside for critical life events such as education, healthcare, weddings and so on. It was not lost on anyone that the arrests came just days after Finance Minister Nirmala Sitharaman told Parliament that, among other banks, ICICI had written off loans worth Rs 42,164 crore. In the light of so many loan defaults and disturbing corporate events, corporate governance should be high on the national agenda. With the Union Budget not too far away, it’s a good time to think of how we can ensure better management of Indian companies.
Before I talk about the state of corporate governance and what can be done, let’s understand the ICICI Bank case and what Chanda Kochhar is accused of.
The matter first came to light when a whistleblower alleged that Kochhar’s husband Deepak and her family had benefited from her decisions in the bank. The loan to Videocon was cleared by a committee of which Kochhar was a member. The CBI says she abused her position and “got illegal gratification/undue benefit through her husband”.
Kochhar had been at ICICI, India’s third-largest lender for over three decades, rising up the ranks to become a trailblazer in Indian banking. She had been handpicked by banking titan KV Kamath to lead ICICI.
Kochhar denied any wrongdoing. She stated: “I reiterate that none of the credit decisions at the bank are unilateral… the organisation design and structure obviate the possibility of conflict of interest.”
It is this case and many others that have put corporate governance practices under the microscope. It is said that the debate within Indian industry and the corridors of power is whether major regulatory changes are needed to improve corporate governance or whether they would be restrictive for businesses.
As of now, way too many companies have poor governance standards and that is why you see so many corporate crises. These range from loan defaults to the staggering number of non-performing assets of banks to fraud. Regulators have not always wanted to be proactive because of the pushback from India Inc, which claims too much regulation is stifling.
While you could argue that the Companies Act of 2013 emphasises on governance through boards and processes, the law is not always followed correctly. Boards are supposed to ask difficult questions of management and guard against poor decisions. This doesn’t always happen because directors often turn a blind eye to questionable practices in return for the promise of greater profits.
Let’s take the legal requirement to have both independent and women directors. First of all, this applies only to listed companies and specified classes of public companies. Many companies have neutralised this by appointing family members or trusted acolytes to the board, thus meeting the legal criteria but ensuring that these directors are not really independent.
Such dodgy practices have become so common that private equity investors now say that governance standards are one of the top criteria for picking companies to invest in.
External, independent auditors are the other crucial component of efficient corporate governance. They provide objective assessments of companies and their managements. Despite that, India has witnessed several scams and corporate disasters. And yet, no external auditors have been held accountable.
What Union Budget 2023 should do is put corporate governance firmly on the economic agenda instead of offering tiny band-aid for a large, gaping wound. It must be understood that bad corporate governance will ultimately affect a company’s performance and shareholder returns. Besides, for India to grow economically, it needs investors to be confident enough to offer capital. For that, it needs good businesses and governance.
So, I come back to the need for strong regulatory framework and its proper enforcement. After all, weak oversight is a huge risk, and so is management override of governance principles.
Perhaps the Budget should offer a way for independent directors to be more empowered. In fact, this would be the most critical safeguard for minority shareholders.
Here are a few thoughts to improve matters:
- Link at least part of CEO pay to company performance
- Even compensation for executive directors should be a derivative of an objective performance evaluation conducted by the board
- Audits should include assessments of the board through the prism of transparency
- The selection of independent directors should be transparent, objective and as per institutionalised processes
- Rating agencies haven’t always done their jobs well. They need to get their act together and provide objective assessments of companies’ financial health
- Regulators should signal intent that they are serious about taking action against irregularities and non-compliance
Good corporate governance is essential for India’s economic engine to truly fire. In a rapidly changing and hyper-competitive environment, systems of corporate governance must evolve too. In such a situation, they must have integrity, transparency and accountability at the core. Once again, I return to the regulators, those like the Securities and Exchange Board of India and Ministry of Corporate Affairs. How they enforce laws and, by extension, ensure good corporate governance will be shaped by their action or the lack of it.
Lastly, let’s not be under the false impression that only listed or large companies should be concerned about corporate governance. The fact is that poor practices, across the corporate spectrum, add up. And, in the end, impact you – the small shareholder, the small savings account holder, the corporate employee, the legitimate credit seeker.
It’s not someone else’s problem.
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at firstname.lastname@example.org. Catch you again soon.