At a time when corporate governance is the most talked about issue, a Crisil study has found that governance standards are weak in nearly half of the companies, whose initial public offerings (IPOs) have been graded by credit rating agency.
"Of the 29 IPOs graded by Crisil since May 2007, corporate governance structures were found to be weak in close to 50 per cent of the companies evaluated," Crisil said in its research report.
"While not the sole determining factor, the quality of corporate governance as assessed by Crisil may significantly influence the Crisil IPO grade, beyond what the company's business prospects and financials may suggest," Crisil Research Head-Equities Chetan Majithia said.
Analysts at other grading agencies said that while assessing the fundamentals of the company, the issue of corporate governance is not a major determinant.
"Corporate governance is one of the criteria for arriving at the grade of the IPOs. We concentrate on the structure if we have any information about non-compliance issues or past conduct of the management," ICRA Managing Director Naresh Thakkar said.
The Crisil research found that about 10 per cent of the 29 companies graded were found to have robust corporate governance structures. About 25 per cent of those graded were average and 15 per cent were above average, it said.
Thakkar said that before grading, ICRA gives due weight to the company's management strengths and weaknesses and issues, if any, from the corporate governance perspective.
Crisil said that the quality of board and their independence and propensity for related party transactions emerged as key differentiators between well and weakly governed IPO graded companies.
The research found that the board of the "weakly governed IPO graded companies" were dependent on the promoters and there was limited understanding of the independent directors about the business of the company.
"A view on the company's corporate governance is particularly relevant for IPOs, since investors may have only limited information on the company's or promoter's track record," Majithia said.
The issue of corporate governance has come to the fore in the wake of the Satyam scandal, in which the company's founder disclosed of an about Rs 7,800-crore financial fraud in the firm's accounting books.
