The Indian system has been known for lax regulations for decades. On one hand, India has thousands of inefficient PSUs which suck the taxpayer’s money for their grandees, on the other hand ‘regulation’ is non-existent in many sectors like accounting and corporate governance. Therefore, the Indian state is present in many areas where it should not be while there is a laissez-faire system prevalent in areas which need tough regulation.
The global credit rating agencies like Moody, Fitch, and Standard & Poor fooled Indian government and investors for years and gave high ratings to firms which were on verge of default like IL&FS. The Big Four global auditors Deloitte, Ernst & Young, and PricewaterhouseCoopers (PwC) and KPMG have not been able to detect irregularities in the accounts of defaulters like Nirav Modi led Gitanjali Gems.
The global rating agencies and audit majors have been unfair to the Indian government as well as to investors and often collaborated with the potential defaulters to get their share in the pie. The previous governments have been easy on these firms in name non-interference in private businesses. However, this cost to the investors as well to the government which has to take over the defaulters like IL&FS to save the system from spillover effects.
Modi government has taken a stand against rating agencies in the first term and now it acted against the auditors. Recently Indian arm of Ernst &Young (EY) was suspended after the regulatory bodies found irregularities in its audit.
In the latest step to clean up corporate governance, the Ministry of Corporate Affairs has decided that independent company directors will have to sit for competitive exams and they could be appointed to the position only after clearing the same. The independent directors are expected to be ‘watchdogs’ of companies and detect irregularities in the corporate governance in such companies. The government tries to protect the interest of retail investors of the company through the compulsory appointment of independent directors.
But in the last few years, it was witnessed that the independent directors have not been true to their profession and they ignored irregularities in the case of PNB-Nirav Modi scam, IL&FS fraud and many others.
Therefore an online assessment would be conducted for the post independent directors in which the candidate will have to sit for proficiency company law, ethics and capital market norms. “We want to demolish the myth that independent directors don’t have any fiduciary duty,” said Injeti Srinivas, top bureaucrat in the corporate affairs ministry. “We want to propagate corporate literacy to make them aware of their duties, roles and responsibilities.”
The aspiring directors will have to pass the exam in a fixed time frame but the number of attempts is unlimited. The experienced directors with years on company board would be exempted from the exams but they must register to the database being compiled by the government. This database would serve as a single point window for the companies looking for independent directors. Every listed company in the country must have one-third of its board filled with independent directors.
This is a welcome step by the government to move the political economy of the country to ‘rule-based capitalist economy’. In the laissez-faire system, big fish eat the small fish but the rule-based capitalist economy would be fair to everyone stakeholder. The welcome move by the government would improve ‘corporate governance’ in the country.