M Damodaran, chairman of the Securities and Exchange Board of India (Sebi), is known for using his public speeches effectively to warn market participants on specific regulatory issues. Last week, addressing a corporate governance summit, he wa-rned against non-compliance with clause 49 of the listing agreement of stock exchanges and said bourses will be “persuaded” to act against certain “big companies” that are flouting the rules “before the year is out.”
Capital market watchers heard the warning with a sense of deja vu. In December 2005, Mr Damodaran had issued the same warning to corporate India. That was when companies were confident their hectic lobbying with the ministry of company affairs (MCA) would lead to a postponement of the amended deadline on clause 49 compliance. The MCA did try to push Sebi to postpone the deadline, but it did not happen. One may recall that the Naresh Chandra and JJ Irani committees, both set up by the MCA, had told Sebi not to tighten reporting requirements through the listing agreement when the Com-panies Act itself was to be amended.
When the lobbying failed, private companies rushed to comply with the most contentious provision of the amended clause 49, that half the board must comprise of independent directors. By January 2006, private sector companies had, by and large, complied, but many public sector companies (PSUs) had not. Sebi did not follow through with any ss“stringent action” for the next eight months. Even now, Mr Damodaran only plans to “persuade” bourses to initiate action at the end of the year.
Last December, Sebi had announced it would identify defaulters in January, and suspend their shares after giving adequate notice on impending action, so that those who wanted to sell their holding could do so. None of this happened. Penalising or suspending PSU shares for failure to comply with listing rules can easily turn into a political hot potato, as appointments to PSU boards are often goodies doled to politically-connected persons. Any Sebi insistence could land itself and the bourses in a tight spot.
On the other hand, failure to act will erode its authority and credibility. Last week, Mr Damodaran parried a query on its apparent reluctance to follow through with “stringent action”, saying Sebi did not want to be a “trigger-happy-kid.” But corporate India, as well as the stock exchanges, will be watching to see if and how the regulator actually follows through on its threat.
Corporates, as well as the stock exchanges, will be watching to see if and how Sebi actually follows through on its threat
Re-composition of the board is just one part of the amended clause 49. But, unless Sebi can enforce this, other aspects of the listing rules pertaining to corporate disclosures and announcements, insider trading, risk assessment and certification will quickly lose their teeth. Already, there is plenty of evidence that stock exchanges do not bother to verify corporate announcements. In the ferocious bull run of the past three years, shares of small, medium and even inconsequent companies have spiralled up because their managements got away with a series of false announcements about expansion, acquisition and fund raising plans or their profitability, in order to manipulate their share prices upwards. There were several cases where the promoters dumped their own holdings even while the company announced spectacular financials. None of these attracted regulatory action, alt-hough they were reported by the media.
Even the high profile complaints by Anil Ambani about violation of corporate governance rules by Reliance Industries have gone into limbo after the group demerger. Another example is of Helios & Matheson, whose alleged acquisition of vMoksha has been contested by Rajeev Sawhney, one of the owners of vMoksha, through an avalanche of documentation. The matter is also before the courts in Chennai. Yet, there is little action or investigation by regulators in order to clarify the situation for ordinary investors.
The irony is that stock exchanges never attempt to verify statements emanating from companies, even when it is pointed out that these are false or exaggerated. At the same time, they go through the motions of verifying media reports with company managements in order to “provide accurate information to the investing public.” Since corporate responses are never verified, it ends up as a meanin-gless exercise that only devalues the regulatory process.