India's bourses have hundreds of Satyams

There're hundreds of Satyams listed on the stock exchanges. Good coporate governance seems to be last in the priority list as over 1,200 companies listed on the Bombay Stock Exchange (^BSESN : 16030.54 -11.64) have yet again failed to comply with corporate governance norms for the quarter ended September 2008.

"In terms of Clause 49 of the Listing Agreement, 1,228 companies have not submitted corporate governance report," the BSE says. The exchange has been putting out almost the same number of companies in the list of those of violating Clause 49, quarter after quarter. The Indian Express had earlier reported about this menace but the exchanges and the regulator are yet to tackle the issue.

Experts said this is a serious issue as Clause 49 covers all major functions of a company and its board, including composition of the board, audit committee, CEO/CFO certification of accounts, basis of related party transactions, disclosure of accounting treatment and details about subsidiary companies. Listed companies - there are 4,995 companies listed on the BSE - are expected to follow the corporate governance structure as laid out by Clause 49 in the listing rules.

"Most of these companies are small- or medium-sized companies. Promoters of some of these companies do overstate/ understate profits and fudge their accounts. But the magnitude of fudging is on a much smaller scale when compared to Satyam (SATYAM.BO : 98.55 +1). But, when so many companies fail in corporate governance, it could become a problem for others including shareholders and lenders," said DR Dogra, executive director, Care Ratings.

Former BSE executive director M R Mayya also said that "corporate governance is an issue with many companies which is largely due to poor quality of some promoters and independent directors." Fund diversion and fudging of accounts in hundreds of small- and medium-companies are never properly identified and probed.

Investors Grievances Forum President Kirit Somaiya said the Forum is planning to file a public interest litigation (PIL) on the issue of corporate governance violations by a large number of listed companies. "Small investors are silently suffering in such a large number of companies. This should be stopped," he said.

The exchanges have their own limitations in enforcing compliance. They can issue a show-cause notice to those who violate the listing norms and suspend or delist the stock if violation continues. But if the stock is delisted or suspended, investors will suffer as they will be stuck with illiquid stocks.

Clause 49 says: "where the chairman of the board is a non-executive director, at least one-third of the board should comprise of independent directors and in case he is an executive director, at least half of the board should comprise of independent directors." There is no way to check the quality of independent directors of hundreds of small listed companies.

It says a qualified and independent audit committee should be set up with minimum three directors as members. Two-thirds of the members of audit committee should be independent directors. But some of the companies don't have such committees while the quality of the audit committee in many companies is dubious.

The CEO (managing director) and the CFO (whole-time finance director) or any other person heading the finance function "should certify to the board that they have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief and these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading".

They have to certify that these statements together present a true and fair view of the company's affairs and are in compliance with existing accounting standards, applicable laws and regulations, as per the Clause.

Companies should submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter. "Many listed companies are blatantly violating the governance norms listed in Clause 49. It's not surprising that over 1,200 companies have not followed the rules. The regulators should conduct an audit of these 1,200 companies and take suitable remedial action," Somaiya said.

What is Clause 49?

Clause 49 of the Listings Agreement covers all major functions of a company and its board, including board's composition, audit committee, certification of accounts, basis of related party transactions, disclosure of accounting treatment and details about subsidiary companies. All 4,995 listed companies on the BSE are expected to follow the corporate governance structure

Not a new problem

As many as 1,228 companies have not submitted corporate governance reports for the quarter ended Sept '08. The exchange has been putting out almost the same number of firms in the list quarter after quarter

What can the bourses do?

The exchanges have their own limitations in enforcing compliance. They can issue a show-cause notice to those who violate the listing norms and suspend or delist the stock if violation continues

Who gets hurt?

If the stock is delisted or suspended, investors will suffer as they will be stuck with illiquid stocks

In theory

• Where the board's chairman is a non-executive director, at least a third of the board should comprise independent directors

• A qualified and independent audit committee should be set up with minimum three directors as members

• Persons heading the finance function should certify to the board that they have reviewed financial statements and the cash flow statement for the year

In practice

• There is no way to check the quality of independent directors of hundreds of small listed companies

• Some of the companies don't have such committees while the quality of the audit committee in many companies is dubious

• Promoters of some companies overstate/ understate profits. Fund diversion, fudging of accounts are never properly identified and probed

On Board

With the government's appointment of three members on the Satyam Board, the industry felt that India's reputation globally might be salvaged and, to a certain extent, restore industry's confidence in the beleaguered company. Here's what the industry chambers had to say...

Chandrajit Banerjee, Director general, CII: The (board) members have corporate experience, proven track record and, most importantly, proven image on corporate governance. The newly constituted board should give out a clear message to the company's associates, clients and shareholders that Satyam would be able to tide over the current crisis and survive. One of the first priorities is to clean up books of accounts, finish process of investigation and present it to the public. The board will also take a look at new management structure

Rajeev Chandrasekhar, President, Ficci: The priority of the government should be to ensure that the Satyam board immediately arranges financing to ensure that salaries and payrolls of the 50,000 plus employees are met without disruption. The decision to appoint a three-member board will restore confidence of global investors in India Inc

D S Rawat, Secy General,Assocham: The reconstitution of the board and the government taking charge of the troubled company would send (the) right signal. The move will save the company from the collapse. It is a confidence building measure not only for employers and stake holders but the Indian business as a whole

Som Mittal, President, Nasscom: This will help ensure business continuity, built confidence and protect the interest of all stake holders - employees, customers and investors