Sucheta Dalal :What's governance got to do with it?
Sucheta Dalal

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What's governance got to do with it?  

Dec 13, 2004

The latest issue of ‘Boardroom Insider’, an online governance newsletter published by Ralph D. Ward has an interesting take on how CEOs ‘adapt’ to governance reforms. ‘‘How is the relationship between germs and antibiotics like that between CEOs and governance reforms?’’ he asks. The answer: ‘‘In both cases, we believe that clever new versions of the latter will finally control the former — but both bugs and bosses soon learn to adapt, and even work the changes to their own advantage’’. Ward goes on to discuss the goings on at Walt Disney & Co, where he says, CEO Michael Eisner converted good governance into a ‘tactic’ and quickly adapted it into a ‘new board control tool’.

This is exactly what comes to mind when we see Anil Ambani raising questions about ‘good corporate governance’ at Reliance Industries Ltd (RIL) and Reliance Infocomm. If Reliance’s board has ever asked tough questions, it is a well-guarded secret. If the media is happily lapping up leaks about the manner in which Rs 11,000 crore was funnelled into Reliance Infocomm, or how Mukesh Ambani has carved out a mini empire for himself at the cost of RIL shareholders, it is only because an ‘insider’ is providing details.

Let’s be a little realistic. Can a board that did not question the strategies by which the Ambani family has continued to hold such a high stake (34 per cent) in RIL, even when the group grew to a mammoth Rs 100,000 crore over the last couple of decades, suddenly be asking tough questions today, because one Ambani brother wants to wage a war for control?

Anyone who has followed the growth of the Reliance business empire knows that the constant shuffling of shares and money between hundreds of investment companies has been the key to keeping the family stake so high. This was true in the early 1980 when investment companies with names like Crocodile and Fiasco gained notoriety to this day when Rashid Alvi’s (a member of Parliament) website ( listed 251 investment companies that allegedly belong to the group.

Meanwhile, a capital market regulator was set up, who mandated several disclosure requirements and compelled the appointment of ‘independent directors’ but it only led to cosmetic compliance. Even today, as the media spews out detailed leaks on the complex transactions, questionable ‘sweat equity’ and dubious name changes that combined to allow Mukesh Ambani and his family to control 55 per cent of Reliance Infocomm, what stands out is the thundering silence of all those who are either responsible for ensuring good governance or likely to be affected by bad corporate practices. The independent directors have been happy to sign off on supplementary agendas and draft minutes that reduce the powers of the vice-chairman and managing director without discussion.

An issue that ought to have raised serious concern is the hefty 12 per cent stake claimed by Mukesh Ambani as ‘sweat equity’ for a mere Rs 50 crore investment in a mature business. Although Reliance Industries has funded nearly 90 per cent of the Reliance Infocomm venture, it had no say on the issue of sweat equity or its pricing. After all, Mukesh Ambani, the recipient of this equity, is also executive chairman of Reliance Industries.

The implications are enormous. Reliance is India’s largest private sector company and often led the way in questionable corporate practices. It has inspired scores of neo-Ambanis who aspired to make large public issues and create thousands of crores worth of assets overnight. This has caused big holes in the pockets of investors and banks. If Reliance is allowed to make such a twisted interpretation and mockery of the ‘sweat equity’ concept for a brazen enrichment of an individual promoter holding at the cost of a publicly listed company, this could soon become an open corporate practice for all of corporate India. Whenever they want to keep a huge control over a large project, promoter families will simply corner ‘sweat equity’, putting very little of their own cash and indirectly transferring shareholders’ wealth to their personal coffers.

But nobody is asking any questions. The 30 million shareholders, who once filled up football stadiums at Dhirubhai’s festivals like Annual General Meetings are worried but silent. Indian banks and institutions asked few questions when they had nominee directors on the board, so there is little likelihood of their turning more vigilant today, when Reliance has a considerably lower borrowing from them.

The only person to mention good governance is brother Anil Ambani who has been deeply involved in the Reliance brand of corporate governance all these years. And that too only when the board stripped him of powers through a surreptitious manoeuvre.

Otherwise, things are not very different at the Anil Ambani-controlled Reliance Energy either. What else explains the curious resignation of six full-time directors one evening or their subsequent withdrawal? Does this indicate that Reliance is a professionally-managed company or one where professional directors jump at the chairman’s bidding? Were the resignations deliberately timed to create panic among shareholders and depress prices? When I asked one of the directors, he replied, ‘‘I am not authorised to speak on the subject.’’ As for REL’s investors, they don’t even know if its independent directors expressed concern at the irresponsible action of the company’s subsequent board meeting.

Nobody knows how the battle for control at India’s most powerful business group will end, but the revelations so far only prove Ralph Ward’s contention that companies have found a way to work around corporate governance regulations to ensure that their business activities remain as opaque and hidden from investors as ever.

So far corporate India has collectively used its power to knock down all attempts to make it more accountable to investors, stakeholders and society. They forced the withdrawal of a tough Companies Bill (that had sought to bar companies from floating more than on investment subsidiary) and forced the capital market regulator to withdraw the proposed nine-year term for ‘independent’ directors as well as the need for a ‘mandatory’ whistle- blower policy. But as the largest Indian company has shown, a family member can sometimes blow the loudest whistle, even if it is self-serving.

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-- Sucheta Dalal