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Promoters need corporate governance tuitions
Fri, 1 Aug Pre-Open

Corporate governance standards lie at the very root of a healthy stock market.

Why?

Because why would you, as minority investor, become co-owner in a listed company if you weren't confident that the guy controlling the company is going to act scrupulously? So the whole of the market for listed companies is based on the premise that good corporate governance standards will be followed, and errant promoters will be held accountable. Without this basic premise, everything else in the stock market will fall apart.

A recent report in a leading business daily highlights how there have been a few significant instances in corporate India that are serving to shake this foundation.

One such instance has been when Cairn India, of which the promoter Vedanta (an Anil Agarwal company) owns 60%, decided to give a Rs 75 bn loan to a promoter group company Sesa Sterlite. The company has maintained that the funds are being lent at 300 basis points above LIBOR. However, the fact remains that this is a related party transaction from a cash rich listed company with many minority shareholders to a debt burdened recipient.

Ideally, the minority shareholders would have liked to see this cash in their hands rather than in that of a leveraged promoter group company's, more so if their company so no avenues for investment in its business.

Real estate company Lavasa, which is going to come out with an IPO soon, has also raised eyebrows by giving a large construction contract to a group company on discomforting terms. JSW Steel too recently announced that it intends to pay an annual Rs 1.25 bn to a promoter company for owning and promoting the 'JSW' brand.

This is one area where corporate India needs to tread very carefully indeed.

If anything, Indian companies have a lot of catching up to do on this front already. The last thing Indian stock market investors need is a spate of high profile cases involving promoters trying to abuse their control of a company in which they are not the only owners.

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