Will NSE Prime Help Lower Instances Of Corporate Mis-governance?

The National Stock Exchange (NSE), India’s largest stock exchange, launched NSE Prime framework to improve corporate governance. The initiative looks to encourage companies to go beyond the bare minimum asked by regulatory authorities and establish better governance practices.

Why Does Indian Need Better Corporate Governance Standards?

With the Indian equity markets attracting hordes of domestic and international investors in recent years, corporate governance has emerged as a critical issue in public companies.

Often companies follow the laws for corporate governance in letter, but not in spirit. Hence, a voluntary corporate governance framework could help Indian companies communicate that they have good corporate governance standards.

In recent years corporate governance, or rather the lack of it, has become a bone of contention between promoters and shareholders. Several companies have seen management remuneration resolutions fail due to shareholder opposition, as shareholders felt that the remuneration was not in line with business performance.

For instance, in 2018, India’s second largest tyre manufacturer, Apollo Tyres said that the company’s promoters Onkar Kanwar and Neeraj Kanwar had decided to take a pay cut of upto 30 per cent for fiscal 2019. The move came after shareholders opposed the management’s decision to increase salaries despite the business not performing well.

Similarly, Zee Entertainment’s management had a face-off with Invesco, which is the largest shareholder in Zee. Invesco accused the management and the board of mis-governance, and raised questions about the independence of the board of directors.

At Eicher, the manufacturer of Royal Enfield, Managing Director Siddhartha Lal saw the special resolution to increase his salary face shareholder opposition and fail to garner the required number of votes. Another two-wheeler manufacturer, Hero Motocorp saw a similar opposition to management remuneration increase as well.

Other concerns include the lack of truly independent directors, self-serving resolutions, small boards, lack of disclosures, high related party transactions, conflicts of interest, and other factors. Companies with corporate governance issues usually receive lower valuations when compared to similar businesses.

Therefore, by creating a separate framework, NSE is looking to make investing easier.

Similar Frameworks in other Countries

The United Kingdom’s Quoted Companies Alliance offers a list of voluntary corporate governance-related disclosures for companies listing on the exchanges.

Brazil has a system of voluntary compliance to stricter standards that was introduced by the Brazilian stock exchange in 2000. The index of companies registered under the stricter governance framework has delivered higher returns compared to the exchange’s benchmark index.

It is clear that everything else being equal, investors would prefer buying into companies with stronger corporate governance standards. The system known as the Novo Mercado model, did not see much activity until 2004 where a majority of listings took place through Novo Mercado listings. The model helped instil faith in the Brazilian markets, and in the companies that followed the standard prescribed in the framework.

Which Companies Qualify for NSE Prime?

The Prime framework would only be applicable to companies where public shareholders own 40 per cent or more of the total outstanding shares. However, the rules by the market regulator, Securities and Exchange Board of India (SEBI) stipulate a minimum public shareholding of 25 per cent only. A higher public shareholding makes it difficult for promoters to pass special resolutions that require at least 75 per cent of votes in favour.

In addition, to become a member of the framework, the company would have to have a minimum of eight board seats, and a maximum of fifteen board seats. Compared to the minimum eight board members as per the Prime framework, the SEBI stipulated a minimum of only six.

Overall, the framework would result in greater transparency, distribution of power among managements and investors, and possibly greater board independence. NSE could create a list of companies that meet the criteria and create an index for the investors who are concerned about governance.

India is pushing for better Corporate Governance Standards

There appears to have been a greater push for transparency and corporate governance in recent years from the regulators, government, and market infrastructure companies. The government is looking to overhaul the existing laws for Chartered Accountants as well, in order to make auditors accountable for their actions.

SEBI has been introducing reforms to make listed firms more transparent, to keep investors from being misled. For instance, a recent SEBI proposal highlighted that generic reasons for fundraising through Initial Public Offerings (IPO) be limited, and the details about the application of funds should be clearly stated out.

With the introduction of Prime, we could see more companies adopting better standards as Environmental Social and Governance (ESG) criteria take a front seat for larger investors. Higher standards of corporate governance could make fundraising easier, and would help to create wealth for investors in the longer term.

Also Read: Is Reliance Behind The Zee-Invesco Fiasco?