DFIs take up corporate governance initiative

DFIs take up corporate governance initiative

Mumbai: To improve standards of corporate governance in emerging economies including India, 32 international development finance institutions (DFIs) will have a framework to implement best practices in governance at the companies they invest in.

The so-called Corporate Governance Development Framework will be signed during the annual meetings of the International Monetary Fund and the World Bank Group on Friday.

The basis for the guidelines under this framework is the corporate governance risks and opportunities evaluation system followed by the International Finance Corporation (IFC), the development finance arm of the World Bank.

The common approach is expected to set consistent standards for corporate governance, due diligence and common expectations from clients.

Apart from IFC, some other signatories to the framework that have a significant exposure to companies and projects in India include the Manila-based Asian Development Bank (ADB), CDC Group Plc of the UK, and the Netherlands Development Finance Company, also known as FMO.

Though the exact quantum of debt and equity investment by development finance institutions in India isn’t known, IFC disbursed $438 million (2,146 crore) in the country for 28 projects for the financial year ended 30 June. ADB’s India portfolio on 31 December comprised 67 ongoing sovereign loans, amounting to $10.2 billion, according to the bank’s website.

Such multilateral agencies working in India hold that although the country’s overall standard of corporate governance is better than some peers, there are areas of concern.

While sound regulatory provisions such as clause 49 of the listing agreement help maintain good corporate governance in India, when it comes to implementation, there are companies “with stellar practices as well as those with no conceptual knowledge of corporate governance at all", said Darrin Hartzler, manager of the IFC Corporate Governance Unit in Washington DC. “What is further intriguing is that Indian companies often approach corporate governance from a compliance point of view, while in other markets it is more an area of strategy, organizational structure, as well as behaviour."

Richard Rekhy, head of advisory services in India at international audit and consulting firm KPMG, said the move would be “good for corporate India".

“It will serve as an incentive to good corporate governance as companies will be able to access more finance from these institutions and also at better rates," Rekhy said.

Indian firms that have been associated with such funding agencies welcome the intentions behind the joint framework.

Companies will benefit from the guidance of funding institutions, said Chandra Shekhar Ghosh, managing director of Bandhan Financial Services Pvt. Ltd. Earlier this month, Bandhan received 135 crore of equity funding from IFC.

Rekhy said India’s corporate governance standards were sound but pointed to areas needed attention such as those regarding the roles of promoters, independent directors and internal auditors.

The perception of India’s corporate governance standards compared with Asian peers has also taken a hit. In a September 2010 report on corporate governance in Asia by CLSA Asia-Pacific Markets , India’s ranking fell to seventh among Asian countries, from third in 2007.

The report said India has failed to adequately address key governance challenges such as the accountability of promoters, the regulation of related party transactions and governance of the audit profession. Some independent directors, who draw only a nominal sitting fee to attend board meetings, may be motivated to maximize the number of directorships they hold, thereby minimising the time commitment to each single company, Hartzler said. On the other hand, some independent director who earn a certain share of the company’s profits are paid too much.

“It is a widely acknowledged standard in corporate governance that independent directors should only be paid through an annual lump sum in cash or in shares," Hartzler said.

IFC also feels that other Asian countries have embarked on a more stringent regime where certain kinds of related party transactions need to be approved upfront before they happen, either by the audit committee or even a group of minority shareholders. Further, only a few companies in India are found to stipulate a clear policy for related party transactions.

“Even after the Satyam scandal, governance practices of Indian companies have not changed in this regard, and an opportunity has been missed to establish higher trust with investors in general and DFIs (development finance institutions) in particular," said Hartzler.

Satyam Computer Services founder B. Ramalinga Raju in January 2009 confessed that the information technology firm had overstated earnings and assets for several years to the tune of 7,136 crore, raising concerns over corporate governance standards in India.