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Traditionally, corporate governance lapses have been uncovered at small and mid-cap companies. However, with increased shareholder activism, tighter disclosure regime and elaborate compliance, even blue-chip companies and industry leaders have now been discovered to have governance issues. In an unprecedented trend, industry leading companies such as Sun Pharma, Yes Bank, IndiGo Airlines, Zee Entertainment, and Indiabulls Housing Finance have faced allegations of corporate governance lapses this year. A little over half the companies in the Nifty 50 index received a cumulative 4,552 whistle-blower complaints in FY19 — 30 per cent higher than the previous year.
2. Record number of Independent directors and auditors exit companies before end of terms
A fallout of a spate of corporate governance scandals in 2019 has been a record number of mid-term cessations of auditors and independent directors. The number of exits of independent directors from boards of Indian companies increased 54 per cent year on year in calendar 2019, as per data from nseinfobase.com. Also, 58 auditors stepped down mid-term in 2019, a tad higher than the number in 2018. Market regulator Sebi has taken actions against auditors for faulty audits and made qualifying examination mandatory for being an independent director.
3. Related-party transactions and siphoning of funds new eyesores
Related party transactions and siphoning of funds from the business have been the emergent issues in corporate governance of India Inc in 2019, moving beyond board governance and executive compensation that dominated the discussions earlier. From Sun Pharma to Indigo Airlines to Apollo Hospitals, some of the leading companies faced scrutiny for their related-party transactions. Illegal fund mobilisation in violation of Companies Act topped the list of the nature of violations in the prosecution launched by Sebi as revealed in the regulator’s latest annual report. As many as 47 out of the total 65 violations mentioned were pertaining to illegal fund mobilisation.
4. Increased action by regulatory bodies
Sebi initiated a record 309 enquiry proceedings in FY19 as against just 16 in the previous year. The market regulator also launched 65 prosecution cases against 399 persons/entities in the year, against 56 prosecutions launched against 407 persons/entities in FY18. Sebi also received a record 419 applications for settlement of cases in FY19 – 75 per cent jump over the previous year’s 241 applications. At Rs 46 crore, the amount collected towards cumulative charges was nearly 50 per cent higher than the Rs 31 crore collected in FY18.
The corporate affairs ministry has struck off 3,38,963 companies from official records in the past two financial years for failing to submit annual returns. As of end of November 2019, the ministry had deactivated 19,40,313 director identification numbers in the official database due to non-filing of KYC details. The move is to clean the system of shell companies and ghost directors.
5. Emergence of ESG funds in India
What began in 2018 picked up as a trend in 2019. With ESG (environmental, social, and governance) compliance becoming an increasingly important risk area, asset management companies have been launching ESG-themed funds to filter good quality stocks for their investors. Bombay Stock Exchange and NSE had launched their ESG-themed indices in 2017 and 2018, respectively. Kotak Mutual Fund was the first in 2018 to sign the UN-supported Principles for Responsible Investment (PRI). Four more investment management firms from India became signatories to PRI. SBI Magnum Equity Fund turned into SBI Magnum Equity ESG Fund. In 2019, many mutual fund houses forayed into the ESG segment. Some filed draft documents with Sebi to launch ESC schemes. The alternate asset management arm of Avendus Capital launched India’s first ESG-based fund. Three former Tata group executives came together with asset manager Quantum Advisors to launch a $1-billion ESG fund.
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