Commentary: India: Paying Lip Service To Corporate Disclosure

In late June, Ratan Tata, chairman of India's $8 billion Tata Group, did something virtually unprecedented for a top Indian executive: He gave notice. Two years hence, said Tata, he would step aside. And that's not all. Rather than name a successor himself, he vowed to leave the decision to the board. Indian corporate chiefs rarely retire--and never stop meddling with their boards--so this was exemplary.

Tata's professionalism is just what the government wants to encourage in India's boardrooms. After decades of ignoring corporate governance, India's policymakers realize that companies that honor investor rights actually attract more investment.

New Delhi recently unveiled a corporate governance code that seeks to make Tata's performance the rule rather than the exception in a nation notorious for its clubby boardroom culture. Companies now are supposed to disclose ownership breakdowns and crossholdings, adhere to global accounting norms, hire truly independent directors, and set up audit and shareholder grievance committees.

Bravo for India--but what's next? It certainly doesn't seem that an impeccable code of corporate conduct will revolutionize India Inc. Yes, the government threatens heavy fines for companies that don't comply with the code. Yet few expect a scramble to follow Tata's example. Moreover, despite vows by the Securities & Exchange Board that errant companies will be delisted, few believe it.

"It's a lofty goal," says Marti Subrahmanyam, a professor at New York University's Stern School of Management. In fact, India's corporate governance code puts it ahead of most Asian nations. "But," says Subrahmanyam, a member of several Indian boards, "many [companies] don't have the desire, capacity, or resources to change."

Indeed, for decades, Corporate India has operated with little oversight--not from shareholders, not from outside directors, certainly not from the government. Consider the last annual general meeting of Grasim Industries, the $1.2 billion cement maker, held in a remote location. Of its 13 directors, just one showed up, while only a handful of the company's 300,000 minority shareholders attended. And they were employees who were unlikely to hold management accountable.

It's not as though India Inc. hasn't had a chance to come clean. In the early 1990s, high interest rates at home forced some companies to raise money overseas, where investors demand greater transparency. This prompted such conglomerates as Great Eastern Shipping and Reliance Industries to begin putting in place more robust corporate governance.

Yet many Indian executives still don't walk the walk. Take Kumar Managalam Birla, chairman of the A.V. Birla group. He is known for his integrity and helped devise the new code. Yet he misses meetings with investors and gives independent directors short shrift. Over at Zee Telefilms, management ignores analysts' requests for information, even though poor financial disclosure has helped drive the stock sharply down.

COVER UP. So, absent a cultural revolution, much of corporate India is not ready for the transparency New Delhi hopes to impose. Families continue to control 90% of publicly listed companies. And they have plenty to hide--not least intragroup loans and investments set up to minimize taxes, misappropriate funds, and cover up losses.

As for a government demand that half a company's board be comprised of independent directors, executives say it isn't feasible. Yet this is a crucial reform. Currently, most "outside" directors hail from financial institutions that hold a stake in the company these same people are supposed to oversee. True outsiders are hard to find in India's byzantine business circles. Besides, now the courts can punish directors if they don't do their jobs. Hardly an incentive for board membership.

Investors are hopeful that a new generation of entrepreneurs and new-economy players will set a better example. Moreover, the foreign mutual-fund managers and venture capitalists now knocking on India's door demand clean accounts and strong, independent boards. Eventually, many of India's family-run dinosaurs will have to go public. With luck, the market soon will be powerful enough to punish those who don't come clean. But India's investors had better start pushing now.

Before it's here, it's on the Bloomberg Terminal.