At a time when sections of Indian business are clamouring that the takeover code be held in abeyance as there is no level playing field, it is reassuring that the governance code has come out unequivocally in favour of a regime that allows takeovers and bankruptcies as a disciplining device for managements. However, the code suggests a major innovation that will level the playing field: Indian financial institutions and banks be allowed to support players in takeover battles. Clearly, without this they will lack the leverage that foreign players with access to their institutions will have. The whole problem with this totally unexceptional recommendation is that state-owned institutions without the requisite commercial ethos can hardly undertake the very complex business of funding bids or defences. Hence, leading and well run banks and institutions should be privatised.
The code strikes the right note about having a sufficient number of non-executive directors, giving the board sufficient information so that it can do justice to its role and the need for a strong audit committee of the board. The code has also adopted a sound principle which underlines many of its recommendations: all shareholders are equal and so domestic ones should not be treated like the poor cousins of GDR holders when it comes to disclosures. But the code goes awry on two major issues. First, it stops short of recommending the compilation of consolidated accounts and predicates this on the tax laws making the exercise worthwhile and the institutions agreeing to lend on the basis of group gearing. Then it lays down a 50 per cent holding norm for consolidation. The fact is that precise holding does not matter. Control does. To the extent that one company comes to the aid of another group company in a manner that can undermine its own shareholder interest, consolidated accounts add to transparency and
shareholder value. Since the total number of groups with listed companies cannot be that many and all enjoy institutional finance, the institutions can, as a beginning and for their own information, ask for consolidation, specifying which companies need to be included. This can then form an annexure to the annual accounts of listed group companies, voluntarily included.
The other major negative recommendation is that the number of companies with institutional directors should be reduced and where their holdings go below 10 per cent, removed altogether. This is based on the logic that the institutions nominees have not done their job well and since the institutions are government-owned, they cannot maximise shareholder value. These are all good arguments to call for the immediate privatisation of the institutions so that they can look after the interest of their shareholders and loaned funds well. It is absurd to call for the rewriting of loan covenants so as to remove the directors. Surely it is a commercial decision, to be thrashed out between the lender and the borrower, as to what will make the lender feel more secure. It is absurd for the code to recommend whether an institutional lender or shareholder should ask for its own directors on the boards of assisted companies or not.