CAG audit of private telecom companies – Governance or Interference?

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CAG audit

 

In a verdict yesterday, the Delhi High Court allowed the Comptroller and Auditor General (CAG) of India to audit the accounts of private telecom companies under the Telecom Regulatory Authority of India (TRAI) Act.

This his kind of ruling was unthinkable even a few years back as CAG was and is still largely seen as an auditor of companies owned by the government.

As natural resources such as spectrum, gas/oil fields, coal, etc cannot be easily priced,  the government has a big stake in these sectors and many of these companies that are involved in the production sharing of natural resources or profit sharing from natural resources  enter into a public-private partnership (PPP) with the Government of India, so it appears logical that industries and sectors that deal with precious natural resources come under the ambit of CAG.

CAG doing audit of such private companies will have the several ramifications on the overall dynamics of the industry.

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Investor Participation in Corporate Governance

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Shareholder Engagement or Activism ?

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Continuing from my last post ‘ Is shareholder engagement good for companies? ’,  here we look at the scope of shareholders engagement and different approaches to shareholder engagement.

What is the scope of shareholder engagement?

Shareholders have a legitimate role in areas pertaining to:

  • Corporate Strategy – such as mergers, diversification, restructuring, non core asset sale.
  • Capital Structure – such as capital allocation discipline, use of cash on balance sheet.
  • Governance – such as audit-related issues, board structure, managerial remuneration.

However shareholders are not expected to micromanage companies. Nor is it desirable that shareholders push for short term profitability over sustainability and long term value creation. It is important that shareholders and board members engage effectively in the shared pursuit of high quality governance.

What are the different ways in which shareholders engage with companies?

Shareholders can either have a proactive approach for engagement with a company or may adopt a passive approach towards a company.

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Passive investors sell off their shares if they are dissatisfied with the corporate decisions.

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On the other hand, active investors engage proactively with the management, prior to a corporate decision being affected, in order to change the outcome of the decision. While the term ‘shareholder engagement’ is used to describe a collaborative approach, ‘shareholder activism’ refers to the use of a more assertive approach by the minority shareholders to affect changes in management and strategy of a firm. Read more

Is shareholder engagement good for companies?

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Shareholder activism has increased significantly in the last few years, particularly after the financial crisis of 2008. However, it has since then been a debatable topic, as it is difficult to quantify “appropriate” level of shareholder engagement, which is desirable for achieving effective governance, while adding to business value. Quite often there is an apprehension that excessive shareholder intervention may consume a lot of valuable management time and result in short term profit orientation.

Why should shareholders engage with company management and boards?

A business needs capital to finance its growth Shareholders are the providers of capital to a business and as such are part owners of the business. Shareholders invest in the business hoping for a higher potential return from the investment while accepting a greater potential risk than other providers of capital. As shareholders own a share of the organization in which they have invested, this entitles them to ownership rights (i.e. rights to profits and assets in proportion to their shareholding) and in most cases control rights (i.e. rights to have a say in the running of that company, e.g. they may vote on key issues).

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Management makes use of the capital to run the business and has an obligation to do so in a fair and transparent manner while maximizing value for the shareholders.  Read more

Companies Bill 2012– Giving Voice to Minority Investors in India

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The passing of The Companies Bill 2012 by Rajya Sabha on 8th August 2013,  is a step forward towards transformation in the corporate governance practices of the country. The new bill that requires President’s assent for it to become law, replaces the Companies Act of 1956. The bill, when enacted will bring in reforms to enhance corporate governance by giving voice to the minority investors in India, strengthening the role of independent directors and expanding the responsibility on auditors.

A key objective of corporate governance in India has been to strike a balance between the rule of majority shareholders and the protection of the rights of minority shareholders. The protection of minority shareholders rights is particularly critical given the often concentrated ownership of Indian companies.

Unlike in the developed countries such as US & UK, where ownership of a company is widely dispersed and is generally separate from the management of the company. In India, listed companies are usually parts of a large business group, characterized by a promoter or a controlling shareholder.

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Role of Independent board directors in Indian companies

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The probe into Satyam scam is finally over.  SEBI has barred Satyam Computer’s founder B Ramalinga Raju and four others from markets for 14 years and asked them to return Rs 1,849 crore worth of unlawful gains with interest.

Following the takeover of scam-hit firm Satyam by Tech Mahindra in 2010, Mahindras were contemplating to sue the company’s erstwhile independent directors to recover Rs 11 million paid as commission to non-executive directors during the financial year 2008-09. Each of Satyam’s former independent directors were paid a commission of Rs 12 lakh over and above sitting fees for the financial year 2008-09.

The Independent Directors of Satyam included renowned people like management guru Krishna G Palepu, Pentium chip innovator Vinod Dham, former Indian School of Business dean Prof Mendu Rammohan Rao, former cabinet secretary TR Prasad, former IIT Delhi director V S Raju and US-based academician Mangalam Srinivasan. It is ironical to note that in the presence of such eminent independent directors, the company’s founder Ramalinga Raju could manage to fudge the company’s accounts for several years.

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