Too much policing hampers governance

The corporate governance standards in India suffer from weak enforcement due to overlapping regulatory functions among the Securities and Exchange Board of India (Sebi), the ministry of company affairs and the various stock exchanges.

"A fragmented structure of jurisdiction of various bodies runs the risk of regulatory overlap and weakening of enforcement," said Michael Carter, Country Director (India)of the World Bank.

He added transparency in related party transaction and matters regarding insider trading were the challenges faced by India in the area of corporate governance.

The minister of company affairs, Prem Chand Gupta, however, denied the existence of any overlap. "While the Sebi handled matters related to listing and public issues, the ministry looked after all other company issues," he said.

Gupta also assured that the government was against unnecessary policing but could not completely do away with regulation either.

"One corporate scandal affects the shareholders' trust in the whole financial sector and consequently, the larger interests of the society. It is, therefore, the government's responsibility to prevent such occurrences," he said.

The World Bank country director also pointed out that the corporate governance laws in India should clearly specify the role of directors on the board.

The directors should also have access to training to fully understand their rights, he said. He admitted that the main responsibility of ushering in good corporate governance practices lay with the private sector and over-regulation may not be the solution.

He said that good corporate governance practices attracted "patient" capital or long-term investment, which was important for stability of the markets. A presentation made by the World Bank stated that apart from improving enforcement, there was need to improve disclosure standards.

It pointed out that sanctions against auditors when their report did not conform with the law were very less and hence, ineffective. Even the disciplinary procedures through the Institute of Chartered Accountants of India were lengthy.

The bank has suggested that Sebi should regulate disclosure by selectively reviewing the on-going disclosure documents and financial statements and improvements in monitoring continuous disclosures.

The bank has also recommended that institutional investors should nominate independent directors to the boards of portfolio companies, instead of awarding positions to current or retired employees, to ensure that conflicts of interest are handled in a better way.