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Getting it right in business

The long-delayed Companies Bill can get us better boardroom behaviour as the role of independent directors, often a weak spot in detecting fraud, has been defined better as are the obligations of auditors.

india Updated: Dec 23, 2012 21:50 IST

India is a step away from putting in place a new corporate governance regime that seeks to improve protection for all classes of stakeholders. The Lok Sabha last week passed the Companies Bill, which widens the ambit of a 1956 law that governed how the 30,000 firms registered then conducted their affairs. The country today has 8,50,000 companies that operate in a very different environment and need a new set of playing rules. The law has been long in the making. It has at its core the recommendations of a committee headed by JJ Irani, former managing director of Tata Steel, submitted to the government in 2005. India’s efforts coincided with a global alignment of corporate governance and the Irani committee drew upon the international experience. The draft law was, however, tabled in Parliament in 2008, too late in the UPA’s first term. The bill re-entered the legislative circuit in 2009 and its 2011 iteration incorporates new provisions suggested at the committee stage.

The wait may be worth it if we get better boardroom behaviour at the end of this. The role of independent directors, often a weak spot in detecting fraud, has been defined better as are the obligations of auditors. Tighter rules now govern companies seeking to raise money from the public. The quantum of employee compensation is defined if firms want to wind up. Class action suits empower minority shareholders. The recently set up Serious Frauds Investigation Office gets its mandate to look into financial crimes. Besides the policing provisions, the bill also tries to instill a value system within India Inc. This comes through in directions on managerial compensation, holding structures of firms, affirmative action for women and statutory spending on social responsibility. The last, while aimed at nurturing the ecosystem from which companies derive their profits, is contentious but the government has tried to limit its impact to those at the very top of the corporate food chain.

A single piece of legislation will not lead India into an era of shareholder capitalism that can sustain prolonged growth. The economic environment, too, must be conducive. Indian companies face a fragmented market for goods and services and a rigid labour market that discourages mobility. The equity cult is still feeble among the broad mass of Indian savers and managerial talent is hard to come by. Despite these odds, and a rickety law, companies have been putting up an impressive show: the private corporate sector raised its savings from 6.6% of the gross domestic product in 2004-05 to 9.4% in 2007-08 before sliding to 7.9% in 2010-11. Indian companies chip in with every fourth rupee invested in the country. After corporate governance, the government must look at the ease of doing business.