Mumbai: Only a handful of Indian firms have been ready to voluntarily subject their corporate governance to assessment by credit rating agencies. Of the 4,700 listed firms whose shares are traded in India, a mere 19 have made their corporate governance ratings public.
The reluctance to provide investors with an independent evaluation of the way they are managed matters in the aftermath of the accounting fraud at Satyam Computer Services Ltd and fears that domestic and global investors could sell shares in the resulting suspicion about the quality of corporate disclosures in India.
Also See Taking Stock
Corporate governance ratings were first undertaken by Crisil Ltd, an associate of global ratings agency Standard and Poor’s, in 2003. Two other ratings agencies, Icra Ltd and Credit Analysis and Research Ltd, or CARE, followed. The trio has rated around 50 firms, but only 19 have disclosed their ratings to the public. The others have preferred to keep them secret. Infosys Technologies Ltd has been rated by both Icra and Crisil and received the highest ratings from both the agencies.
The ratings are voluntary and the companies have the right to accept or reject them. “So far only a limited number of companies have approached us for corporate governance ratings,” said Anjan Ghosh, head, corporate ratings, Icra, an associate of global rating agency Moody’s Investors Service.
“Companies approach us for ratings and also for corporate governance assessment. We give our opinions on the governance practices and the perceived strengths and weaknesses from a governance perspective,” Ghosh said.
Since it is voluntary, according to the rating agencies, only those firms that have a strong urge to improve their corporate governance or are sure about their governance standards approach the rating agencies.
Firms don’t like to make public their ratings when the ratings do not match their expectations. “Only accepted ratings are made public and acceptance ratio is somewhat low,” said Rajesh Mokashi, executive director of CARE.
According to Raman Uberoi, senior director, corporate governance ratings, for Crisil, though there is an improvement in corporate governance standards in India, a lot more needs to be done, particularly in family-owned firms that went public or are planning to go public.
“There are some companies which have very high standards and there are others which still need to do lot of work,” he said. “Especially the family-owned companies, which are run in a particular manner and are now trying to professionalize, definitely need to do a bit to improve corporate governance.”
Apart from corporate governance ratings, the three agencies also offer company assessments and diagnostic services to firms to help them improve their governance.
According to the agencies, most companies serious about improving governance standards generally opt for assessment and diagnostic tools rather than a rating. The agencies suggest various measures to improve governance standards and some companies come back to the agencies working on their recommendations, based on which the ratings are sometimes revised.
The key factors considered when a credit rating agency assesses governance standards in a company are the ownership structure, governance structure and management processes, board structure, relationship with the stakeholders, transparency and disclosures, financials and ethical practices.
Following the Satyam fiasco, rating agencies are expecting that shareholders would ask for more governance disclosure than before.
However, rating agency executives said unearthing corporate frauds is not their job and it a job best done by the auditors. “We give ratings based on available information. A listed entity has to follow the corporate governance standards, based on listing agreements,” one agency executive said on condition of anonymity. “We haven’t done too many ratings when the market was buoyant as people were looking for other factors and doing their own analysis of governance and management rather than asking for a third-party assessment,” said Uberoi of Crisil.
Ghosh of Icra also said companies come to the rating agencies only when they are sure and see a value in the product.
There is unanimity among all three agencies though that corporate governance practices in India are improving.
“There is a strong emphasis on improving corporate governance practices and a lot of these companies have gone beyond what is mandated by the prevailing laws and instituted best practices in terms of corporate governance,” Ghosh said.
Even though the rating agencies are not sure whether corporate governance ratings will be made mandatory, as credit ratings are, they believe shareholders will increasingly demand corporate governance ratings for the companies they have invested in.
Graphics by Ahmed Raza Khan / Mint