Rebuilding Trust Through Good Governance

Diwali is a celebration of the victory of good over evil. This Diwali, the markets seem to be indicating that the bad times are nearing an end. Coincidentally, the UPA II’s current tenure is also drawing to a close, and the market is hoping that the new government will bring in good governance and rational policies to reignite the dying spirit of the Indian economy. No wonder the current optimism is driving our markets within kissing distance of their lifetime highs.

The economic indicators are still trailing behind expectations. However, under the leadership of Dr Raghuram Rajan, some progress has been made by the RBI in stemming the slide of the rupee against the dollar. The forced devaluation has also helped to contain the trade deficit by enhancing exports and in pepping up some of the corporate results.

In a period dominated by gloom and dictated by corruption, a failing economy and volatile policies, this change in mood is being welcomed by our markets. However, the sustenance of market sentiments will depend on the ability of the corporate sector to show a strong performance. Everyone is now looking at India Inc. to demonstrate its mettle and live up to the expectations of the markets.

Technically, the last market rally has been fuelled by the inflow of FII money. The Indian markets have had many opportunities in the past to learn that FII money chases opportunities and can be very fickle if the expectations are not met. Domestic Institutional Investors (DIIs) have also supported this rally by exercising restraint on profit booking. Both these groups seem to have faith in the potential of Corporate India. It is time for the latter to pay back and live up to the expectations.

The road for India Inc. is definitely uphill, considering that they will need to deal with high interest rates, unstable policies and a weak global economy. However, the consumption story of our country continues to be the silver lining.

The missing link in the market seems to be the confidence of the retail investor. This group seems to be absent for a long time now, the reason being the trust deficit between the investor and the market. This category of investors has suffered wealth destruction due to scams, policy reversals, poor corporate and economic performance and unfair trading practices. In order to sustain the growth story, all stakeholders in the market will have to take cognisance of these causes and make a strong attempt to re-establish the confidence of this category. A comeback by this category will surely trigger and sustain a new rally.

One important element for rebuilding the lost confidence is corporate governance. In the recent past, the markets have been periodically pounded by ugly corporate practices. Indian companies need to mature and propagate self-regulation in this area of governance. Investors’ wealth and their trust is being adversely impacted by malpractices and creative financial engineering. Companies need to forego short-term opportunities and focus more on deriving benefits from a healthy consumption-led economy. Here is a quick look at some of the recent acts of corporate greed that have shooed away the retail investors.

Satyam was the first big blow on the corporate governance front. In 2009, when Ramalingam Raju, the then Chairman of the company (and of course the promoter), confessed to having falsified its accounts and manipulating them to the tune of USD 1.47 billion, it sent shockwaves across the market. Coming from a company like Satyam, a fraud of this magnitude hit every promoter’s credence. What followed was enough to blight the image of Indian promoters as a whole. What happened between Raju’s resignation and the taking over of Satyam by Tech Mahindra could have served as a big lesson for Indian companies.

But looking at the situation today, I am forced to assume that India Inc. has clean erased Raju, his misdeeds and the consequences of such dubious actions from its collective memory. While the Nira Radia tapes opened the proverbial can of worms surrounding corporate lobbying, the NSEL saga rewrote the rules of corporate fraud, taking a leaf out of Harshad Mehta’s jugglery. The recent allegations placed on the A V Birla Group company, Hindalco in the coal block allocations has further deepened the gorge of trust between the investor and corporate India.

Corporate India needs to realise that such stories have steadily eroded the confidence of its investors. Of what consequence will be the efforts that regulators and intermediaries make in the direction of attracting more investors, especially retail, to the markets if the companies themselves aren’t really serious about governance? Why should the already edgy and risk-averse investors be pushed into the market when the asset class itself is enmeshed in a web of duplicity and deceit.

I hope this festival of lights will light up the morals of India Inc., which will establish a rock solid foundation of trust between them and their investors and boost the market’s morale. May this Diwali truly be the victory of good over evil. Whilst wishing each other happy times and prosperity ahead, let us all resolve to make efforts to re-establish the trust that has been lost.

V B Padode
Editor-in-Chief