Fall of the Titans: How shoddy corporate governance destroys companies

Anil Singhvi, chairman, ICAN Investment Advisors

Two new-age tech companies, which set out to revolutionise the country’s financial and education landscape for inclusive growth, met with a disastrous turn of events. The writing was on the wall for some time. But unfettered ambition, greed, and a hint of arrogance blinded the founders, marquee investors, and the board to the imminent fall.

Byju’s, an edtech giant, was valued at $22 billion less than two years ago. Its valuation crashed to under $1 billion last month. After years of alleged lapses, shareholders, collectively owning about 30 percent stake in the cash-strapped startup, have called for an EGM later this month to oust Byju Raveendran, founder and CEO, and his family members from the board.    

Paytm, the fintech giant, received a major jolt from the Reserve Bank of India on January 31. After a rap on March 11, 2022, the banking regulator barred Paytm Payments Bank from accepting deposits, credit transactions, and top-ups from customers after February 29. The central bank said it had given the fintech “sufficient time” for course-correction. Timely action by its board of directors could have saved the company from this crisis.  

The Paytm and Byju’s debacle only adds to the long list of companies that have seen deep value erosion due to poor governance structures and an ineffective board that failed to discharge its duty towards minority shareholders and other stakeholders. The Sony-Zee deal dragged on for two years before the merger was called off. Similarly, a murky boardroom battle at Religare shows how the board is inappropriately backing its executive chairperson, Rashmi Saluja, to thwart a takeover bid by the Burman family, the company’s largest shareholder. Saluja has been accused of misgovernance by a proxy advisory firm and the Burman Group.  

In light of the state of corporate governance in India Inc, we caught up with Anil Singhvi, chairman, ICAN Investment Advisors, on Forbes India Pathbreakers to get an overall picture. In part one of a wide-ranging conversation, the former managing director and CEO of Ambuja Cements and the founder of IIAS, a proxy advisory firm for institutional investors, talks about the ineffective role of the board in most organisations, and discusses how independent directors and auditing firms must be held accountable with punitive measures in cases of financial mismanagement, fraud, and corporate failures. Edited excerpts:

Role of independent directors and auditors: ‘Both should be taken for a class action suit’

I think we are still evolving markets. I mean, go back to Satyam. PwC was caught completely napping on the game. Did we even ban PwC? Look at the similar kind of situation in America. Anderson went up belly up. Why? It was a similar situation where somebody cooked up the books and they were caught and Anderson was asked to close shop. We didn't do anything to PwC. Because then the whole politics comes into play. I'm just putting a reference of Satyam, but there have been many cases in the last 10-15 years. Why NFRA has come in, because the Institute of Chartered Accountants failed miserably in punishing their own, but whether involving the agencies will really serve the purpose, the answer is no. I think we must set some exemplary situations to demonstrate that we mean business. Now, we heard about one cable manufacturer where income tax raids were conducted and they found that a very large amount of money was not accounted for… What is the audit firm doing? What is that chair of the audit doing? What are independent directors doing? If you believe that the income tax department, an external agency, can unearth this kind of a thing, why couldn't the auditors do it? So I think somewhere a class action suit according to me is the real game changer, which hasn't happened, but in future will be the game changer. So independent directors and external auditors both should be taken for a class action suit.

Also read: Corporate Governance: Will the real independent directors please stand up?

Independent directors: ‘Are they independent?’

We have got a term, and it's a very superlative term, called independent director. He is not independent. How was he appointed? Ultimately, boards in India are more like friends, family and extended family. There's nothing else on that. So the true role of independent director comes in when you take a trusteeship. Leave the promoter alone. The promoter is doing what is best for the company and for the management team, but you should become the goal post. Many times, we have seen the auditors, rightly so, being held responsible. When was the last time that the audit committee chairman was held responsible and a class action suit was filed against him? Why are we shying away from that role and responsibility? If auditors were found to be napping, so was the audit committee chair, and he is supposed to be the competent man to look into the affairs of the company. But I think more often than not independent directors are, every five years or so, getting re-elected and just hero worshipping the promoter or the CEO is the name of the game in India. I think it's high time we move away from that.

Also read: Govt-appointed panel likely to look at tighter regulatory regime for startups amid corporate governance lapses

Board dynamics: Fighting for the minority shareholder’s rights

Many times, when things have really not worked out well, board members are not held responsible for it. More often than not they will say, “We are only independent directors, we do not know what goes on.” But then why warm the chair in the boardroom? Don't accept the responsibility. If you take a responsibility towards external capital holders whom you never met… according to me the responsibility is more onerous. If you are being appointed as a trustee of the people who you have never met or faced, you must rise to the occasion and do a good job. I call them serial directors. They're not independent directors. They're serial directors because the Act allows you to go up to, you know, certain number of directorships. Secondly, you take on this because it is very fashionable to say, “Oh, I'm on the board of seven companies or ten companies.” According to me, you can't even do a job for three companies. Because every quarter, most board meetings take place in a span of 10 days, 15 days, 20 days’ time frame. And there are such complex businesses. How much do you even know about the business? NRC chairs should really work on those aspects before even he or she recommends to the board, leave aside recommend to the shareholders. But I think those are the changes that need to come in.

Sony-Zee saga: ‘Board of Zee has failed miserably in creating value’

I think in this particular case, Sony of course is not a listed company, so I don't have much knowledge on that because they're also organised in a very different manner in India. As far as Zee is concerned, it's been two years, and the board of Zee, in fact it has changed so many times, I don't know who the directors are because many times the directors have not been reappointed or the appointment has not been ratified by the shareholders. That means there is so much of angst in the mind of the shareholder that the board of Zee has failed miserably in creating value. Zee as a brand, as a studio and a house is outstanding, no doubt about it. Some practices were arising out of maybe the promoters having not really met the expectation of shareholders. But you cannot take away the fact that a local firm, an entertainment business, has come thus far. Sony also needed Zee and Zee also needed Sony. Shareholders have been… I mean look at Invesco, they sold their shareholding and got out out of frustration that nothing will get done in India on that. I don’t think we should have those examples.

Boardroom drama at Religare: ‘Nonsense’

Nonsense. The board has completely and fully and miserably failed. Their role is to let the shareholders decide. Let the people who own the shares decide whether X is good or Y is good. How are they presuming that they are good for the health of Religare? It is presumptuous. If somebody saying I already owned 24 percent, the regulation says that I must make a voluntary open offer on that, allow the voluntary open offer, let the person decide whether he or she wants to sell the shares or retain the shares. If they retain the shares, they have confidence in you. If they sell their shares, that means even you don't have confidence. Then how can you become the champion of others. I find it bizarre for an independent director to say that we don't want this open offer to be made without having any competitive open offer on that subject. I think it's nonsense. Complete nonsense for the directors of Religare. I think Sebi should also look at these positions and correct the course. And I think Religare is a very good example. The Board has no role to stop something that somebody is offering. They can give their opinion, but they have no right to stall it.

Also read: A murky boardroom battle shakes Religare, again

Ideas for change: ‘We need a vibrant bond market’

I think it's a remarkable change. I never expected that in 10 years’ time there will be so much of… at least awareness. It may get implemented fully maybe over the next decade. But for corporate India in 2010-11, if I look back on that, this was like you know, a ‘luxury’ to have, not a ‘good’ to have. “Oh, you are well managed and you're ticking all the boxes” from there today I think every board really looks at it whether that particular Act or the resolution will meet the shareholders vote or not, and that is the litmus test. In the last 10 years, I think Sebi has done an outstanding job of at least strengthening this whole process of giving this tool in the hands of the shareholders. So I think it has come a long way. Whether it has changed the landscape, the answer is no.

Now the second thing which comes to my mind is whether the debt providers were equally looking at the corporate governance, the answer is no. We don't have a bond market and bank is more of a bilateral or multilateral situation rather than a bond market. If you have a very vibrant bond market and a very vibrant equity market, I think that will change the whole space. So what I am looking forward to is a very vibrant bond market where corporates don't go to the bank but tap a very vibrant bond market, and the conditions with the bond are that if you do ABC, I will call the bond back. That will make our corporates even more agile on corporate governance, and that is where the role of the rating agencies also will come into play. I think they have failed miserably. Howsoever a big name they may talk about, in the last 5-10 years, in the debt side of the market if somebody failed miserably it's the rating agencies.

The rating agency should not be paid by the companies. The first problem is there, basically because you have a nexus where the companies pay for the rating. It should be the payer who pays. So, at the end of the day, if it is bond market then bondholders should pay the rating agency. They may get a second opinion. Why is there no second opinion? Even the banks don't get second opinion. They get, you know, carried away by the AA or double B or whatever rating, and they just blindly give the money on that basis. The third important factor for the banks is to look at the future cash flows rather than asset-backed lending. I think name lending should stop. You have a famous case of ABG shipyard. It was name lending. A shipyard. A shipyard is just a small strip of land available on the sea and you have labour. It is labour intensive. It is not capital intensive at all. How could $3 billion be given to this? Everyone failed miserably. The capital providers, the board, the lenders, the rating agencies. Money has gone. The point is this.

You can watch the full conversation with Anil Singhvi on Forbes India Pathbreakers on February 14 for more insights on a range of topics from governance to markets to trends in the cement industry.