Opening Remarks at the National Conference on Corporate Governance Trends in India

By
Michael F. Carter
Country Director, India
The World Bank Group
Jacaranda, India Habitat Centre, October 18, 2004

Hon’ble Minister of Company Affairs, Mr. Prem Chand Gupta, Secretary to the Government of India, Ms. Komal Anand, Chairman, Ernst & Young, Mr. Rajiv Memani, ladies and gentlemen, I am delighted to be here today and to support the National Conference on “Corporate Governance Trends in India,” organized by CII and the National Foundation of Corporate Governance which has brought together policy makers, regulators, and market participants to discuss and debate developments in the area of corporate governance.

Over the last decade, corporate governance has risen in prominence as the role of the private sector has increased around the world, and greater integration of financial markets has led to greater competition for capital flows and increased the risk arising from internationally mobile capital flows. While governments play a central role in shaping the legal, institutional and regulatory climate within which individual corporate governance systems are developed, the main responsibility lies with the private sector. Good corporate governance helps maintain the confidence of investors – both foreign and domestic – and attract more “patient,” long-term capital.

The financial crises in East Asia in the late 1990s and its negative effects on fragile developing economies has led the international community to acknowledge that in a world of increased globalization and integrated capital markets, financial crises in individual countries can put at risk international financial stability. This recognition led to a range of initiatives by the international community such as setting up of the Financial Stability Forum and promoting the assessment of systemically important countries on observance of a set of 12 standards and codes relevant to private and financial sector development and macroeconomic stability.

The ‘Reports on the Observance of Standards and Codes’ is one such initiative prepared within the framework of these standards and is a joint initiative of the World Bank and the International Monetary Fund. The World Bank takes the lead on assessment in three areas (i) corporate governance (ii) accounting and auditing and (iii) insolvency regimes and creditor rights. So far the World Bank has conducted ROSC assessments in the area of corporate governance in over 30 countries. The first corporate governance assessment for India was carried out in 2000 and India is one of the few countries where a second round of assessment has been completed. Assessments in the other two areas of Insolvency and Creditor Rights Regime, and Accounting and Auditing are also being undertaken for the first time in India which are expected to be published shortly.

The World Bank’s corporate governance country assessments are a diagnostic instrument based on the OECD Principles of Corporate Governance. They assess the laws, rules, regulations and practices governing the rights and obligations of listed companies, intermediaries and investors in a given country. These assessments are a tool of communication between policy makers and domestic and international investors to reach a common understanding in an environment where countries are competing to attract capital. The current assessment concluded by the World Bank in June 2004 had the benefit of extensive interaction with the ‘Steering Committee’ set up by the Government of India consisting of key stakeholders such as the Department of Company Affairs, Department of Economic Affairs, SEBI, Stock Exchanges, Industry Associations, Institutes of Chartered Accountants and Company Secretaries and other practioners in the market.

The current corporate governance assessment for India has found that over the last few years, a series of legal and regulatory reforms have transformed the Indian corporate governance framework and improved the level of responsibility and accountability of insiders, fairness in the treatment of minority shareholders and stakeholders, board practices, and transparency. Nonetheless, enforcement and implementation of law and regulations remain important challenges.

I would like to highlight some of the key areas for reform identified in the recently published corporate governance report:

The challenge for regulators is to enhance market integrity by enforcing rules and regulations in a professional, timely, transparent and consistent fashion. Regulators should ensure that sanctions and enforcement are credible deterrents to help align business practices with the legal and regulatory framework, in particular with respect to related party transactions and insider trading. This would greatly improve confidence of investors and other stakeholders in the financial markets.

The current institutional framework places the oversight of listed companies partly with the Department of Company Affairs (DCA), partly with the Securities and Exchange Board of India (SEBI) and partly with the stock exchanges. This fragmented structure gives rise to regulatory overlap and weakens enforcement. A streamlined regulatory structure would help improve accountability and market discipline.

Board practices in India need to be strengthened. A key missing ingredient in India today is a strong focus on director professionalism. Directors are expected to know their duties of care and loyalty to the company and all shareholders. However, as that is not always the case, we believe that the law or other regulations should clearly spell out the responsibilities of directors and they themselves should engage in the formulation of their tasks and work procedures. Director training institutes can play a key capacity building role and expand the pool of competent candidates. In this context, I am pleased to note that the Department of Company Affairs through the National Foundation for Corporate Governance has taken an active role in setting up ‘National Centres for Corporate Governance’ which will provide credible director training opportunities and promote director professionalism in India.

A presentation of the key findings and policy recommendations of the Bank’s Corporate Governance Assessment for India detailing the key issues I raised above will be made by my colleagues in the next session.

On a related note I would like to draw your attention to the recently published World Development Report 2005 on Investment Climate which finds that arrangements with such voluntary compliance mechanisms (such as the ROSC assessments) enhance credibility even though they do not impose any binding obligations. Governments interested in signaling to investors that they apply high regulatory standards in this area have incentives to submit their domestic laws and policies to independent third-party scrutiny -- and to attain high standards. Apart from India, developing countries such as Brazil, Georgia, the Philippines, Poland and Turkey have subjected their policies to such assessments.

Finally, I would like to end by saying that India has taken several important steps over the last few years to improve its investment climate and corporate governance framework. It will have to sustain these reforms in order to create an enabling environment that will ensure that foreign and domestic long term “patient” capital is available to fund corporate growth and preserve private savings for retirement for the future generations.

I wish the Conference every success. Thank you.