Irrational exuberance redux3 min read . Updated: 10 Oct 2007, 01:44 AM IST
Irrational exuberance redux
Irrational exuberance redux
Apropos the Quick Edit “Irrational exuberance", Mint, 4 October. While the country is gung-ho about the unprecedented growth in stock market and investors, too, are very happy, Mint has rightly pointed out the irrational exuberance in the markets. A huge growth of around 22% in the last three months is actually far from what the fundamentals dictate. This is so when one considers the subprime crisis, a fall in the index of industrial production, exports suffering due to a strong rupee and corporate performance expected to take a hit due to rising interest rates and input costs. These facts show that there is very little that justifies such unparalleled and unseen market growth. At this time, investors, and retail investors in particular, should not get carried away.
This is with reference to the editorial “Beyond myths" that appeared in Mint, 2 October, on corporate governance in India.
The editorial has been written without realizing what will be the effect if the Securities and Exchange Board of India (Sebi) implemented the suggestions made there.
I shall explain the matter further. In the third para the editorial says Sebi’s action against 20 large companies is welcome because it recognizes the fact that some of the biggest misdemeanours take place in well-known companies. Hanging a few big cats is not a bad idea.
The style of writing and making a distinction between a “big cat" and, by inference, a “small cat" was not required. Irrespective of the size, any company, big or small, that makes a mistake has to be pulled up.
Regarding the solution to this problem, the editorial says that imposing a fine on the companies is, in effect, a fine on shareholders. A better idea would be to accept the principle of personal responsibility and impose personal fines on individual directors who are paid to protect the shareholders’ interests.
This suggestion is illogical and dangerous for the following reasons:
a. The requirements of the law are many and sometimes so complex that, in spite of one’s best efforts, slips may occur sometimes.
b. Sometimes the mistakes made are ordinary and more of a technical nature. To impose a fine on anyone for such slips is not proper. A letter of warning should suffice.
c. However, the principle that a director should be fined and not the company is a dangerous one. Before the writer made this suggestion, he should have applied his mind deeply to what he has written.
d. The job of the board of directors is to take policy decisions, to make sure that the team of executives is good and is functioning well and that all the laws made by the central or state governments or by any government authority are fully abided by.
In fact, at every board meeting the chief executive or the managing director is required to place a statement of assurance of the above nature.
It’s not possible for the director or even the managing director to go through day-to-day affairs.
We cannot hold the general of an army responsible if a soldier makes a mistake.
e. The government itself recognizes the fact that several laws, rules and regulations operate in a chain and so in many Acts concerning companies, the government has held that whereas the director concerned will be responsible, the company can certainly nominate some particular person to look after the requirements of the law.
Hence, if the government recognizes that while the overall responsibility is that of the director, the man who has to be punished is the man who is responsible to ensure that all guidelines of Sebi are properly followed.
—K.K. Birla, chairman of HT Media Ltd, which publishes Mint