This week, after Infrastructure Leasing and Financial Services Ltd (IL&FS) took control of Maytas Infra Ltd, another chapter in the Satyam Computer Services Ltd scam ended. Before the dust settled on this episode, another development has raised new questions about corporate governance. The Securities and Exchange Board of India (Sebi) has passed an interim order debarring Austral Coke and Projects Ltd from accessing the capital markets, based on communication received from the income-tax (I-T) department. Sebi has found the allegations made by the I-T department serious enough to order an investigation. The allegations pertain to bogus purchases and sales made by the company, which may have inflated its financials. These are allegations, and only investigations will reveal if there was indeed any wrongdoing.

But the allegations reopen an issue, that of improving the quality of corporate governance, for which no answers have been found. If the financials of companies are suspect, then it puts a question mark on the forecasts used for valuations. If a large company like Satyam could do it for years, what’s the guarantee more are not doing it?

Of course, there is the risk of getting caught and being prosecuted. But to be caught, somebody needs to be on the lookout. That does not seem to be evident. And the existence of multiple regulators and agencies, to whom various powers and responsibilities have been apportioned, weakens the prosecution’s case. For listed companies, Sebi’s regulatory oversight needs to be expanded. Overlapping powers with the ministry of corporate affairs (MCA) does not help. When a listed company commits a corporate fraud (MCA’s jurisdiction), it has a drastic effect on its share price (Sebi’s jurisdiction). The threat of being banned from accessing capital markets, which Sebi resorts to more commonly, is not a sufficient deterrent. The US Securities and Exchange Commission is a good example of a regulator that has far-reaching powers of investigation and prosecution when it comes to corporate fraud.

And then, reform is needed on the audit front, the process that is supposed to ensure that the numbers can be relied upon. Perhaps auditors can be graded based on certain parameters by the Institute of Chartered Accountants of India itself. Companies that fulfil minimum criteria such as revenues and market capitalization will be able to choose auditors belonging to a particular grade only. And perhaps Sebi should conduct a random audit of companies, just as the Reserve Bank of India conducts a statutory audit of banks.

But these are systemic ills. Blaming them alone does not absolve the main culprits—the investors. Institutional investors play a larger-than-life role in the stock markets. But they are virtually absent on the corporate governance scene, a marked difference from their behaviour in overseas markets. Rarely do they ask tough questions in public or make their displeasure known on issues that affect minority investors. And retail investors do not escape blame either. Chasing multi-baggers, closing their eyes to the risks involved and following the herd are just a few traits they need to shed. Till investors make corporate governance a key investment criterion and become more activist by nature, there is little hope for reform.

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