Opinion
The Adani affair revealed gaping holes in governance
Summary
Questions of board oversight and audit integrity brought up by the Adani episode suggest a potential failure of corporate governance that may call for a relook at India’s framework.
Corporate governance scandals follow a distinct pattern worldwide. We assume regulators, auditors and stock exchanges are doing their jobs in preventing fraud and malfeasance. Then a major scam happens, like at Enron, Volkswagen, Theranos, etc. Everyone proposes governance reforms and we think the problem is solved… until the next scandal hits.
The recent Adani scandal again highlights our need for better regulations and effective corporate governance. In 2020, much before Hindenburg’s report, allegations had arisen that the group was involved in fraud, money laundering and environmental destruction. The group was accused of concealing losses in subsidiaries, inflating profits and using complex offshore structures to avoid taxes. Over-invoiced imports to siphon money abroad was another charge. As proper oversight could have flagged such issues in time, this fiasco raises questions of corporate governance in India. The term refers to the system of rules, practices and processes by which a company is directed and controlled. It encompasses everything from the oversight role of a board of directors over its management to internal controls, audit practices and risk buffers. The goal of governance is to see that a company operates ethically, transparently and in the best interests of all stakeholders. India’s Companies Act of 2013 sets out a legal framework for it, with guidelines and rules governing various aspects.
Yet, the Adani episode exposed loopholes. The primary problem identified was a lack of independent directors, with group company boards comprising mostly family members and close associates. Another issue was lack of transparency in its financial reporting. Adani Group companies have been accused of using complex structures to evade taxes and manipulate stock prices. While India does have a robust legal framework, weak enforcement seems to be a problem. This is compounded by business ties with politics that could make it difficult for regulators to act against powerful corporate entities. The role of auditors has also been placed in a spotlight. They must verify financial statements for accuracy and reliability. However, they are often caught napping or looking away.
To address these issues, India may need to strengthen its corporate governance framework. Ties of business with politics need to be explained. Other measures should be aimed at increasing transparency in ownership structures, enhancing the independence and accountability of auditors, and improving the enforcement of rules. Regulators and policymakers must work together to create a level playing field for all businesses, regardless of their size or political connections.
Indian opposition leaders accuse the Securities and Exchange Board of India (Sebi) of laxity in investigating charges against Adani. As a regulator, it should have full independence in conducting a probe. Remember the fate of recommendations on governance made by a panel led by Uday Kotak? Powerful business lobbies got to work, their implementation was first delayed and now seems shelved. This sort of thing mustn’t happen anymore.
Given the impact on India’s stock market of charges against the Adani Group, Sebi, which was seized of questions over its adherence to free-float norms well before the Hindenburg report appeared, should have been on alert. Anyhow, here is what can be done now:
Strengthen disclosure requirements: Sebi could require companies to disclose more information on their ownership structures, related-party transactions and tax liabilities. Opaque practices designed to evade taxes vanish once they are exposed to light.
Improve monitoring of corporate actions: Sebi could enhance its monitoring of corporate deals, such as mergers and acquisitions, to ensure that they are in the best interests of shareholders and do not involve any conflicts of interest. Stricter or more enforceable rules on the appointment and removal of directors could also make a difference.
Tougher enforcement: Sebi could take a more active approach to enforcing its regulations by conducting regular audits and inspections of listed companies. It could also deploy harsher penalties for rule violators to deter business misconduct.
Enhance investor awareness and protection: India’s market regulator should educate investors better about their rights and responsibilities. They need protection from fraudulent practices that only regulators can provide. This programme could include stepped-up investor grievance mechanisms, mandatory investor education modules and strengthened whistleblower protections.
Better collaboration with other regulatory bodies: Sebi should work more closely with other regulatory bodies, such as the Reserve Bank of India and Union ministry of corporate affairs, to share information and coordinate efforts aimed at combating financial fraud and misconduct.
In general, Sebi should continue to strengthen its regulatory framework and pre-emptively enforce regulations to ensure that Indian markets for securities remains fair, transparent and trustworthy.
The Adani scandal exposed weaknesses in Indian corporate governance. It is essential that the issues raised are addressed for India to make the most of its economic potential. The country must attract investment, create jobs and build a sustainable economy.
By strengthening corporate governance, India can create a business environment conducive to long-term prosperity.
M. Muneer & Ralph Ward are, respectively, author and co-founder of non-profit Medici Institute, and a board advisor and publisher.
