The Securities and Exchange Board of India (Sebi) filed an affidavit before the Delhi high court last week, contending that the National Stock Exchange (NSE) was a public entity—in that a majority of its shareholding was held by the government or government-owned entities. This was in response to an NSE plea before the high court that the stock exchange was not bound by the Right to Information Act, and hence not bound to disclose details about its functioning. After Sebi’s affidavit, NSE has claimed that governmental entities do not own a majority in it.
The question then is: Who owns NSE, the platform that decides the market capitalization of all major listed companies—one which has an overwhelming presence in the determination of what is happening in India’s financial markets? If media reports are to be believed, the majority ownership rests with foreign entities. Either Sebi is not aware of all this, or those changes in ownership took place behind the back of both Sebi and the finance ministry.
In short, this is also the question agitating both the media and Parliament when it comes to franchise ownerships of the Indian Premier League (IPL): Who are the owners, what are their financial credentials, has there been round tripping of funds, have commissions been paid or matches been fixed? Perhaps NSE is equally, if not more, important.
Consider another example. The National Highways Authority of India issues tenders for national highways projects. Any entity wishing to submit bids has to satisfy a number of conditions, as set out in a draft concession agreement that has been developed assiduously over three years. One of the stipulations is that the bidding entity should own at least 51% stake in the executing entity and that it cannot divest its 51% stake from the executing body for at least three years after the successful bid. However, there is no stipulation on the ownership of the bidding entity—that is to say, as long as the executing entity is owned 51% by the bidding entity, the latter can change hands freely, as many times as needed. Is this what we had in mind while looking for transparency in corporate governance?
In short, the IPL saga has only brought to light the different legal structures that we have allowed to proliferate in this country over the last few years—which have ended up reducing corporate transparency, boosting flow of funds through tax havens and entities, and establishing complex mechanisms to avoid detection and taxation. It is also clear that most of these are legal, in the sense they comply with existing laws; yet are anti-public and anti-national in the sense that they have allowed corporate entities to get away with structures and actions certainly not in the public interest. Nothing will come of investigations into such structures, for they would all be shown to be legitimate and legal.
The debate over participatory notes a few years ago was the beginning of this problem, followed by the government’s recognition that entities registered in tax havens are legitimate sources for even public-private partnerships—bodies that involve substantial stakes in public funds. To put it bluntly, this is our subprime crisis—a disaster, but also an opportunity to clean up the mess that we have created for ourselves. It is perhaps a lesson that we can draw from the US that in spite of powerful lobbies and strong advocacy, the administration is determined to bring in regulation into the financial sector. The IPL and other stories should be an opportunity to bring in similar regulatory oversight into the functioning of the corporate sector.
Among the first of these could well be regarding the holding company structure for raising funds and making investments. Sebi is already reported to be addressing this issue. However, this needs to be extended to unlisted entities as well. In the area of infrastructure financing, for roads and ports and other construction projects, a number of entities are being set up with cross holdings to separate risk from project to project while retaining control through a web of cross holdings.
A second regulatory oversight, perhaps through both the ministries of corporate affairs and finance, is a requirement that would make equity and debt of all the related entities transparent. There should be no attempt to push project financing liabilities away into undertakings that insulate the promoter from damage.
Third is, of course, through the tax authorities. They must develop some confidence that all their raids and investigations do lead to the discovery of illegal acts and the eventual penalty for them. Why not put out a list of taxes collected from or penalties levied on suspect companies as a result of searches and seizures in the past? Even the wider public can then take up the hunt for wrongdoing and a drive for corporate cleanliness.
S. Narayan, a senior research fellow at the Institute of South Asian Studies, Singapore, is a former finance secretary. We welcome your comments at email@example.com