While Sebi sticks to technicalities... (17 February 2003)
According to media reports, the Securities and Exchange Board of India (Sebi) is expected to clear Grasim Industries’ open offer for Larsen & Toubro (L&T) shares. The reports suggest that Sebi plans to give a ‘clean chit’ to Grasim and permit it to go ahead with its open-offer. Some indicated that Sebi might even ask Grasim to offer a higher price to investors.
Assuming that Sebi does give Grasim a clean chit, it can only be because ‘technically’ Grasim has not assumed control of L&T. In the process of arriving at its decision, Sebi would have to ignore the fact that Grasim acquired a 10.5 per cent stake in L&T at such a steep premium (Rs 390 per share) from Reliance, that it would get a piffling return on its ‘strategic’ investment. Having waited for a year, when Grasim increased its stake to 15 per cent and then made an open offer, at the 26-week average price mandated by the Takeover Code, Sebi would have to treat it as a separate action, which has no link to the first acquisition.
The fact that Grasim was now making no bones about its intention to seek management control of L&T would be thus have no bearing decision because it will not consider the initial expensive purchase from Reliance. Merely because the corporate actions are staggered, Sebi will ignore the fact that all of Grasim’s moves were aimed at getting control over L&T’s management.
In a nutshell, Grasim would have demonstrated that a good investment banker, preferably one who has helped draft the takeover code, can help a company make an ass out of any law and regulation. The only issue is whether the company has followed the technicalities of rules and regulations in form. Let us also not forget that the Kumar Mangalam Birla Committee had said that the fundamental objective of corporate governance is ‘enhancement of shareholder value keeping in view the interest of other stakeholders’. So, in offering retail investors just Rs 190 per share instead of Rs 390 that Grasim paid Reliance Industries, Birla was merely ‘keeping in view the interest of other stakeholders’ namely himself.
If L&T shareholders are upset, that is just too bad. If, as two business newspapers seem to suggest, Sebi’s notoriously slow investigation department does make this argument and gives a go-ahead to Grasim’s open offer, then it bears comparison with another issue that is occupying a great deal of Sebi’s time and attention—that is Corporate Governance ratings.
Over the last few months, Sebi has worked hard to introduce Corporate Governance (CG) in India and to popularise the rating models developed by Indian rating agencies around the world. CG ratings are indeed a good idea and will go a long way in distinguishing good companies from bad and indifferent ones. But CG ratings, by their very nature are subjective; they depend on a qualitative assessment of companies and cannot be based on a set of objective criteria. In its recent discussions on CG ratings, Sebi too has said that ‘it is not enough to comply with the form of corporate governance, or the rules of accounting’ in a ‘ritualistic manner’.
The emphasis should be on compliance in form as well as substance. It has then gone ahead and worked with rating agencies on developing an ‘objective’ framework to come up with a subjective CG rating. The rating models that it has accepted will consider a range of issues such as wealth generation, maintenance and sharing, dividend distribution, creditor-supplier relationships etc. Some ratings will also assign weightages to different stakeholders (shareholders, debt holders, employees, customers, suppliers, society in that order) and judge corporates in relation to these criteria. International research suggests that investors too are in favour of CG ratings.
For instance, the US-based Rating Research Investor Confidence Index, which includes interviews with 500-odd investors in December 2002, showed that 53 per cent of investors polled were interested in independent ratings of companies’ ethics and said that having such ratings would increase their confidence in their own investment decisions. However, they clearly emphasised that the ‘independence, objectivity and integrity’ (or credibility of the organisation providing the ratings) was key.
If we consider corporate ethics ratings as synonymous to corporate governance ratings, then Sebi is clearly on the right track. My question is, will all CG ratings be credible? Some rating agencies that plan to offer subjective CG ratings have had a poor record even in handing out purely objective credit ratings. What protection will Sebi offer investors and stakeholders who are misled by a poor or misleading CG rating?
Let us go back to the Grasim example. Assuming that Sebi does give Grasim a clean chit and clears its open-offer (and do remember that Sebi has been delaying its investigation into insider trading and price manipulation by Reliance Industries in the same L&T case for well over a year), then how will a rating agency rate Grasim for Corporate Governance?
The obvious answer is that the rating will be based on Sebi’s positive verdict. So although the Sebi decision will be based on ‘form’ and not ‘substance’, and while Sebi itself will stick to technicalities instead of worrying about investors’ interest (both with respect to delaying the Reliance investigation and clearing Grasim), it expects rating agencies to hand out qualitative and subjective ratings.
Look at another angle. Corporate Governance ratings are just another revenue stream from rating agencies. If they choose to be tougher in their judgement than the regulator, they will hardly have any business. It is no wonder than that so many important corporate chiefs believe that CG ratings are a good idea, but one that is difficult to implement. Also, investors are usually aware about companies that follow good business practices; it is with regard to the others that they will need an independent opinion or CG rating. Why will such other companies seek a rating and pay for it too? There has to be a pay off. Even the good ones would not want a rating certificate, unless it helps business or boosts their share price. Sebi has been silent on these issues.
If Sebi is serious about pushing CG ratings, it will have to lead by example. Unless its own decisions are swift, tough and objective, it cannot pass on the responsibility of sifting the grain from the chaff to a bunch of rating agencies. -- Sucheta Dalal