The last 15 years have seen a continuous change in the norms related to publicly listed companies, driven by the determination of regulators and investors to improve accountability through more rigid codes of ‘good governance’. These codes depend on independent directors keeping management on the straight and narrow path, but even their biggest advocates would admit to limited success. Companies have found ways of defeating the spirit of every code, and management—whether family-owned or professional—continues to employ the best legal and accounting brains to find ways of paying themselves more money and strengthening control.
The whole business of disclosures and accountability has reached a level of stringency where companies prefer to delist their shares and go private. The governance failure in publicly listed companies has made private equity (PE) more popular among serious institutional investors and PE-funded companies are showing better profitability due to better oversight.
Ironically, India has a set of public companies that turned this concept on its head. We have created our own brand of quasi-public companies promoted by public sector banks, insurance companies and erstwhile development finance institutions (including UTI), which enjoy incredible freedom and lack of scrutiny. I speak of organisations such as the National Stock Exchange (NSE), the National Securities Depository Ltd (NSDL), the Stock Holding Corporation of India Ltd (SHCIL), the OTC Exchange of India (OTCEI) and even Infrastructure Leasing & Financial Services (IL&FS) Ltd.
On the face of it, they seem to be under the strict and direct supervision of the capital market regulator. But a closer look reveals that the regulator has limited supervisory powers, or has allowed them to diversify into unrelated businesses by bleating about lack of powers. In each case, the government is the main culprit for encouraging and blessing such diversification—usually in the name of automation and e-governance—without ever worrying about audit and supervision.
Isn’t it strange that stringent disclosures mandated by Listing Agreement do not apply to quasi-public sector market intermediaries?
Many of these entities are extremely profitable (OTCEI is an exception), but often because they operate in near monopoly businesses and are able to charge high fees for their services. This has allowed NSDL and NSE to have spectacular operating margins of 53% each. NSDL, which commands over 80% of the depository business, is profitable at the cost of the growth and spread of Depository Participants (DPs), and has successfully ignored investor complaints about high depository charges and DPs’ protests about the business being unviable on a standalone basis. NSDL has also repeatedly challenged the regulators’ attempt to force a reduction in its fees and charges.
Similarly, Sebi officials can do little about high fees charged by the two national bourses for providing services such as the reverse book-building platform, although they consider them excessive.
If that were not enough, each of these quasi-public sector entities—NSDL, CDSL and SHCIL—has been rapidly diversifying into the management of large databases such as the tax information network for the government, issuing PAN cards, a database for BPO employees in the IT sector, database for pension funds or even electronic revenue stamping operations (bagged by SHCIL). Although registered with the market regulator, none of these is entirely accountable to Sebi. They are not subject to scrutiny by the Comptroller and Auditor General or the Central Vigilance Commission either. That in itself is not a bad thing if there were a process of ensuring proper scrutiny or accountability.
Instead, NSDL’s reputation for efficiency was badly damaged when a Sebi inspection revealed serious problems during the IPO scam investigation a year ago. One of the worst examples of this lack of accountability is the SHCIL. Despite a severe indictment by the Joint Parliamentary Committee in the Ketan Parekh scam, SHCIL has been allowed to run a non-transparent operation and retain senior managers implicated then. More recently, I have discovered that it has spawned several subsidiaries, whose shareholding has been parcelled off to private entities without the knowledge of its public sector shareholders. Neither its shareholding pattern nor its annual report is in the public domain. It is only after our disclosures in a sister publication that the management actions are being questioned. Here too, Sebi has chosen to remain a silent spectator. A decision to hand to it an ultra sensitive contract to issue electronic revenue stamps in collaboration with a Singapore entity, with a convoluted payment model, is now under government scrutiny.
Isn’t it strange that stringent disclosures mandated by Listing Agreement do not apply to quasi-public sector market intermediaries? As unlisted companies, they escape the scrutiny and performance analysis that listed companies are subjected to by investors. Their top managements enjoy unbridled freedom and increasingly hefty salary and perks. And their institutional directors who bless all management actions do not have a fraction of the fiduciary responsibility imposed on directors of listed companies.
On another note, the ludicrity of this freedom is evident even in IL&FS’s decision to partner Subhash Chandra’s Zee group. IL&FS’s shareholders such as SBI and UTI wouldn’t dare challenge the government-controlled BCCI on their own, but as IL&FS shareholders, they are much bolder. IL&FS had planned to go public in 1991 and even warehoused its shares with UTI in anticipation of its listing. Since then, like other quasi-government entities, it has probably discovered the joys of remaining unlisted, being owned by institutions and escaping public scrutiny.