Damodaran calls for halt to corporate governance ratings

M Damodaran, chairman of UTI Mutual Fund and chairman and managing director of the Industrial Development Bank of India, . urged India Inc to halt the process of corporate governance ratings.

He also voiced his strong reservations against the practice of announcing corporate governance awards "till a large number of corporate houses adopt these norms in content than in form".

He was addressing a breakfast meeting of directors and senior executives of companies in Mumbai today on the role of development bank in creating wealth and ensuring good corporate governance.

The idea of rating governance practices in companies is ahead of its time and run the risk of being used as crutches by lenders instead of conducting a thorough appraisal of the corporate proposals for projects, Damodaran said.

He said that rating agencies should put off the business of corporate governance rating until companies implement corporate governance more in content than as a checklist compliance with the listing agreement.

If the corporates take Damodaran's advice seriously, the rating agencies will lose a chunk of their new business as both the leading rating agencies "" Crisil and Icra "" have been assigning corporate governance ratings to companies.

In fact, today Icra upgraded its corporate governance and stake holders value creation ratings of Godrej Consumer Products.

Crisil has assigned its Governance & Value Creation Rating to HDFC Ltd, HDFC Bank, Hero Honda Motors Ltd, Infosys Technology, Bharti Tele-Ventures Ltd and Dabur India Ltd. The concept of corporate governance rating has been the brain child of Sebi chairman G N Bajpai.

Damodaran also said awards honouring companies for corporate governance should not be presented for sometime the governance practices are not terribly good and a lot more ground needs to be covered.

He said corporate governance is a necessary condition but not a sufficient condition for wealth creation. Central to the entire process of wealth creation is the structured composition of the board of any company.

According to him, financial institutions should have representations on the boards of assisted units so that they can be a part of the decision-making process. This way they can keep a close eye on the functions to intervene at the right time to prevent any wrongdoing.

He also stated that development finance institutions (DFIs) should change their traditional lending process and issue credit based on the intrinsic value of the project.

These institutions, he said, have learnt the hard way that projects backed by sovereign guarantee also carry risk and hence it is important for institutions to lend based on the intrinsic value of the project.