Institutional EYE

Commentary on Corporate Governance Issues

India’s static governance ranking

November 29, 2016

 

Two reports published over the last few weeks warrant close reading and carry important lessons: Ease of Doing Business and Asia CG Watch.  

 

‘Ease of Doing Business’ is a quantitative measures of business regulations across ‘11 regulatory areas that are central to how the private sector functions.’ Since it puts a quantitative number on regulations and outcomes – example, how many days does it take to get permits to start a business, it provides policy makers a clear target. As it is being published annually since 2003, it allows regulators to measure effectiveness of policies. And it now covers some 190 countries, so countries can benchmark themselves against each other and strive for better outcomes. The ‘Ease of doing business’ report has become the bible of well, ease of doing business.

 

How open is India for business?  Not very concludes the World Bank, in its recent ‘Ease of doing business’ report, ranking India at a lowly 130 out of 190. As there has been enough commentary on this report, I will focus on the CG Watch.

 

Published by CLSA, a brokerage and the Asian Corporate Governance Association (ACGA), a non-profit membership association ‘dedicated to promoting substantive improvements in corporate governance in Asia through independence research, advocacy and education.’ ACGA’s member manage over US$25 trillion – which is what given the association and CG Watch incredible heft.

 

The CG Watch focuses on what matters to investors from a governance perspective. To do so it combines a top down (macro or market) measure, a bottom-up (company) score with environmental and sustainability marks.

 

Like the Doing Business, CG Watch puts a number on Corporate Governance (CG) practices so countries are ranked. First published in 2005 and every alternate year since 2010 the report enables progress over time to be measured. Finally, this compiles data across countries – albeit 12 versus 190 for the Doing Business report. But then these are the Asian countries we directly compete with, to attract investor money.

 

The macro score, worked on by ACGA, looks at CG rules and practices, enforcement, political and regulatory environment, accounting and auditing and CG Culture. Interviews with a cross-section of market participant’s bolsters their analysis. The company and ES scores, compiled by CLAS, look at discipline, transparency, independence, responsibility, and fairness.

 

India this year ranked at number seven but has been stuck in the mid-range for most of this period (Table 1 on the next page). This is over a period when we have patted ourselves on the back for the new Companies Act, the alignment of the listing agreement with the Companies Act and its subsequent backing by law, somewhat stricter regulations on related party transactions (- ACGA has penalized for the roll-back) and mandatory e-voting. The score is held back by the need to issue frequent clarifications and amendments, slow progress on regulating auditors and tardy progress in establishing the National Financial Reporting Authority (NFRA) and because PSU’s fail to comply with listing guidelines. Clearly what we gained on the roundabout, we lost on the swing.

 

India’s bottom-up rankings (Table 2) too have remained rangebound during this period. And this is the subject of another article.  

 

There are three over-arching take-aways from the above. The first that details matter. Investors care about PSU’s not complying with the listing guidelines or the tardy progress with regard to the NFRA or the lack of clarity of purpose, leading to frequent amendments to regulations. The second is that even as we push ourselves, others are not standing still. Regulators have run very hard only to find themselves stuck in the same rank. Companies are loudly talking about their governance practices, but have been unable to climb the ladder. Finally, all stakeholders need to work together and in sync. State institutions must be robust, regulations must be best in class, media more probing and companies that are prepared to go the extra mile. Only then will you get the desired governance outcomes.

 

 

A modified version of this column by Amit Tandon, appeared in Business Standard on 29 November 2016. You can access the column by clicking this link or typing: http://www.business-standard.com/article/opinion/amit-tandon-the-message-in-india-s-static-ranking-116112901431_1.html

 

 

 

 

 

 

 

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