Lack of corporate governance widens trust gap

Homegrown comapnies from India and China face a massive ‘Trust Gap’ outside their native country, according to the Edelman Trust Barometer 2023. Trust gap indicates the difference between the trust that the companies command within the country they are headquartered, and the trust these companies enjoy in foreign countries.

The trust gap for Indian companies is a negative 55, while it is negative 58 for Chinese companies. On a scale of 100, if the trust for Indian companies within India is 100%, in foreign markets they will be commanding a trust of only 45%.

Rise of corporate instances that indicate lack of corporate governance coincides with the increase in domestic and foreign Trust gap.

Corporate governance issues in Indian companies display four major themes- flirting with the law to satiate unbridled ambitions, disregard for contracts, culture of indifference to immoral conduct, and abuse of power by promoters and CXOs.

From Start-ups to Upstarts:

The once revered unicorns Byju’s and Paytm have fallen from grace due to their disregard for law, ethics, and interests of their investors. Erstwhile icons like Byju Raveendran and Vijay Shekhar Sharma have now become cautionary tales for the Venture Capital (VC) investor community as well as authorities in India. While Vijay Shekhar Sharma has managed to rile up the central banker, the Reserve Bank of India, the Directorate of Enforcement (ED) has issued a fresh look-out Notice against Raveendran for alleged Foreign Exchange Management Act (FEMA) violations.

As per the Directorate of Enforcement, Byju’s company, Think & Learn Private Limited, has not prepared its financial statements since financial year 2020-21 and has not got the accounts audited, which is mandatory. Notably, the company’s auditor Deloitte had also resigned from its duties in June 2023, citing these reasons.

On the other hand, Vijay Shekhar Sharma’s Paytm Payments Bank ignored multiple notices by RBI to get their house in order until the banking regulator lost patience and ordered the company to suspend its major banking operations.

To make things worse, crypto-exchanges like WazirX thrived in India and its founders basked in adulations of industry and media fraternity only to break the collective trust in young and radical entrepreneurs. The rude shock of their scant respect for the law and the country emerged as their involvement in alleged large scale money-laundering operations and loan-app scams got unearthed by the ED.

Syphoning allegations:

The edtech unicorn, Byju’s, has been accused of allegedly siphoning off funds from its US arm Byju’s Alpha. A consortium of 37 US lenders represented by Glas Trust has moved a Court in Florida in September 2023 accusing that more than ₹4,370 crores were redirected to a Miami based hedge fund to hide the money from the lenders, as Byju’s owed ₹11,373 crores to them, by December 2023.

The Directorate of Enforcement is investigating Jet Airways founder Naresh Goyal for siphoning off funds from the company. Erstwhile promoters of Religare Enterprises Limited, Malvinder Mohan Singh and Shivinder Mohan Singh are also being investigated by the ED on the same charges.

Instances of big tycoons and legendary corporate personalities fleeing to havens after siphoning off funds from their company, or engaging in unlawful activities, is now almost normal. But what is more poignant is the immense respect that the people of India bestowed to them before they revealed their true faces. From Vijay Mallya, to Nirav Modi, Lalit Modi, Mehul Choksi, and more, are the famous white collar criminals absconding from India.

What Contract?

Keeping promises is not just a proper moral conduct but also a legal requirement of contracts. Indian companies, however, seem to adhere to contracts only when it suits them.  

Take the Sony and Zee deal, for instance. As per Sony, Punit Goenka insisting on remaining at the helm of affairs of the merged entity was a breach of terms of the merger agreement. As per Zee, Punit Goenka agreed to step down in the interest of the merger. The proposals that were discussed in this regard included protection from pending investigations and legal proceedings in the best interest of ZEEL's directors and shareholders. Regardless of the blame-game, renegotiating the terms of an agreement at the time of performance is a breach of the agreement.

Sony Corporation has initiated an arbitration process in Singapore International Arbitration Centre (SIAC) against Zee Entertainment Enterprises Limited to seek about ₹740 crore termination fee for alleged breaches of the, now failed, merger agreement.

And while Sony chose the course of International Arbitration, the lenders of Byju’s are at loss about getting Byju Raveendran to adhere to their credit agreement. The company owes more than ₹11,000 crores to its US lenders since March 2023. Its CEO and chairman, Byju Raveendran is not willing to step down from his position to let the lenders appoint a new management and recover their credit. In fact, he is not even willing that his wife, Divya Gokulnath, and brother, Riju Raveendran, be removed from positions of Director in the company. He moved the Karnataka High Court to bring an injunction against the lenders, including General Atlantic, Chan Zuckerberg Initiative, T. Rowe Price Associates etc., for convening an Extraordinary General Meeting (EGM) and passing any resolution against him. To the dismay of the lenders, the Court ruled in Raveendran’s favour.

Speak No Evil. See No Evil. Hear No Evil.

In total misinterpretation of the Gandhian philosophy, the culture of the Indian corporate seems to encourage silence from those who should speak up in the interest of the company and the shareholders.

At Zee Entertainment Enterprises Limited, for instance, the Chandra family owns less than 4% stake while domestic institutions and foreign institutional investors own 43.59% and 28.19% stake, respectively. Yet, when the Merger agreement fell through and pulled down the company’s stock price by 30%, overnight, none of the majority stakeholders raised their voices against the actions of the management that resulted in value erosion of stocks.

In a recent case of five ‘Guest experts’ of Zee Business Hindi News Channel being nabbed by SEBI for fraud and market manipulation through the TV channel, it was revealed that there are no SEBI regulations regarding hiring on guest experts who recommend stocks on TV Channels to millions of investors in one go. A questionnaire sent by Fortune India to multiple TV channels went unanswered. The questions were regarding the selection criteria the channels employ for guest anchors and the vigilance they keep on their conduct.

Unethical is Not Criminal:

The ultimate victims of the loose corporate ethics are the common Indians. The retail investors of the Indian stock market are the victims of market manipulations through organisations that have loose code of conduct and are operated by the corrupt.

It is quite an enigma as to how the unethical acts that involve huge sums of money are seldom perceived as a crime. The Indian society and its justice system present quite a Dickensian dystopia when it comes to corporate deviants. Like the Tale of Two Cities, India may be a tale of two countries. Here, farmers commit suicide because of constant harassment by loan sharks, whose credits they are unable to repay, but corporate loan scamsters like Nirav Modi and Vijay Malya who dupe lending institutions and siphon off crores from their companies, live a life of freedom and luxury in some haven abroad. Cases and investigations of white-collar crimes tend to stretch as long as the red tape but the alleged criminals seldom go behind the bars, though petty criminals usually remain locked up for eons before they are even presented before the court.