<b>Amit Tandon:</b> The message in India's static ranking

Two reports published over the last few weeks warrant close reading and carry important lessons: Ease of Doing Business and Asia CG Watch.

Ease of Doing Business is a quantitative measure of business regulations across “11 regulatory areas that are central to how the private sector functions”. Since it puts a quantitative number on regulations and outcomes — for example, how many days it takes to get permits to start a business — it provides policymakers a clear target.

As the report is being published annually since 2003, it allows regulators to measure effectiveness of policies. It now covers around 190 countries, so they can benchmark themselves against each other and strive for better outcomes. The Ease of Doing Business report has become the Bible of, well, ease of doing business.

How open is India for business? Not very, concludes the World Bank, in its recent Ease of Doing Business report, ranking India at a lowly 130 out of 190. As there has been enough commentary on this report, I will focus on Asia CG Watch.

CG Score (India’s Rankings)

Published by CLSA, a brokerage firm, and the Asian Corporate Governance Association (ACGA), a nonprofit membership association “dedicated to promoting substantive improvements in corporate governance in Asia through independent research, advocacy and education”. ACGA’s members manage over US$25 trillion, which, given the association and CG Watch, is incredible heft. 

CG Watch focuses on what matters to investors from a governance perspective. To do so, it combines a top-down (macro or market) measure, a bottom-up (company) score with marks for environment and sustainability. 

Like Ease of Doing Business, CG Watch puts a number on corporate governance (CG) practices, so countries are ranked. First published in 2005 and every alternate year since 2010, the report enables progress over time to be measured. Finally, this compiles data across countries — albeit 12 versus 190 for the Ease of Doing Business report. But then these are the Asian countries we directly compete with, to attract investor money. 

The macro score, worked on by ACGA, looks at CG rules and practices, enforcement, political and regulatory environment, accounting and auditing and CG culture. Interviews with a cross-section of market participants bolsters their analysis. The company and ES scores, compiled by CLAS, look at discipline, transparency, independence, responsibility, and fairness.

This year, India ranked at number seven, but it has been stuck in the mid-range for most of this period (Table 1). This is over a period when we have patted ourselves on the back for the new Companies Act, the alignment of the listing agreement with the Companies Act and its subsequent backing by law, somewhat stricter regulations on related party transactions (ACGA has penalised for the rollback) and mandatory e-voting. The score is held back by the need to issue frequent clarifications and amendments, slow progress on regulating auditors and tardy progress in establishing the National Financial Reporting Authority (NFRA) and because public sector undertakings (PSU) fail to comply with listing guidelines. Clearly, what we gained on the roundabout, we lost on the swing.

India’s bottom-up rankings  (Table 2), too, have remained range-bound during this period. This is the subject of another article.

There are three overarching takeaways from the above. The first, that details matter. Investors care about PSUs not complying with the listing guidelines, the tardy progress with regard to the NFRA or the lack of clarity of purpose, leading to frequent amendments to regulations. The second is that even as we push ourselves, others are not standing still. Regulators have run hard only to find themselves stuck in the same rank. Companies are loudly talking about their governance practices, but have been unable to climb the ladder. Finally, all stakeholders need to work together and be in sync. State institutions must be robust, regulations must be best in class, media more probing and companies prepared to go the extra mile. Only then will you get the desired governance outcomes.

The author is founder and managing director, Institutional Investor Advisory Service India Limited. 

Twitter: @amittandon_in