In a stunning order, apex market regulator Securities and Exchange Board of India (SEBI) undid a truly mega corporate governance reform in the making by saying the separation of ownership (promoter) and management is now “voluntary” instead of “mandatory”.

It had made the separation “mandatory” for top 500 listed companies in May 2018. These companies were to be professionally managed by ensuring that the chairperson of their board of governance should be a non-executive director; not related to the managing director or the chief executive officer. This was to come into force from April 1, 2020.

Finding the compliance slow, it extended the deadline to April 1, 2022.

But instead of insisting on speedy compliance as the deadline approached, its February 15, 2022 order reversed the 2018 order. Its explanation for this about-turn is: “As the revised deadline is less than two months away, on a review of the compliance status it is seen that the compliance level, which stood at 50.4% amongst the top 500 Listed Companies as on September 2019, has progressed to only 54% as on December 31, 2021. Thus, there has been barely a 4% incremental improvement in compliance by the top 500 listed companies over the last two years, hence, expecting the remaining about 46% of the top 500 listed companies to comply with these norms by the target date would be a tall order.”

Then it revealed one part of the real reason: “Meanwhile SEBI continues to receive representations from industry bodies and corporates expressing various compelling reasons, difficulties and challenges for not being able to comply with this regulatory mandate. Considering rather unsatisfactory level of compliance achieved so far... various representations received... SEBI board at this juncture decided that this provision may not be retained as a mandatory requirement and instead be made applicable to the listed entities on a ‘voluntary basis’.”

None envisaged such a reform to be easy, given the prevalence of family-run businesses in India where ownership and management are indistinct.

Businesses have always opposed this reform in the making for at least a decade (while the new Companies Act of 2013 was being framed). Their opposition or reluctance shouldn’t have surprised SEBI.

Its order separating ownership from management, the merits of which hardly need to be highlighted or debated, came following the recommendation of a committee headed by Uday Kotak of the Kotak Mahindra Bank and with representations from industry and professional bodies (CII, FICCI, ICAI, ICSI), global consultancy firms, law firms, stock exchanges and academicians.

It should have stuck to experts’ view and acted independently, as it is expected to, instead of succumbing to pressures.

The SEBI order omitted why it changed its mind. But it issued another statement the same day which said finance minister Sitharaman had addressed the SEBI Board members the same day (February 15): “Hon’ble Finance Minister, in her address, while appreciating the initiatives taken by SEBI emphasised the need for the regulator to take further steps to reduce compliance burden...”

While the SEBI statement didn’t elaborate which “compliance burden” the finance minister was referring to, SEBI’s decision came a week after she told the market regulator to address the concerns of Indian companies about the separation of ownership from management, though she stated she was not issuing any “diktat” to the regulator.

Rising corporate and bank frauds

Bringing in professional management and separating it from ownership is all the more critical at a time when bank and corporate frauds are rising alarmingly. Many big corporate entities are known to have taken bank loans, defaulted on payment and run away to foreign shores. The Pandora Papers reveal how industrialists allegedly stashed millions abroad to escape paying loans, while declaring bankruptcies in India. Several others have run away, like Vijay Mallya, Nirav Modi, Mehul Choksi, Jatin Mehta and Sandesara brothers.

The latest entry to the list of industrialists embroiled in fraud cases is Rishi Agarwal, former chairman and managing director of the Gujarat-based ABG Shipyard, the prime accused in the over ₹22,000-crore loan fraud detected in 2019, but the CBI issued a look-out notice only on February 15, 2022.

Then there are some business promoters cooling their heels in jails, like Yes Bank promoter Rana Kapoor, accused of multiple loan and money laundering scams that led to the bank’s collapse. Similar is the case with DHFL promoters Kapil Wadhawan and brother Dheeraj Wadhawan, who bought business jet, floated offshore companies as the Pandora Papers revealed, even as the company went bankrupt due to financial irregularities.

RBI reports show a phenomenal rise in banking frauds in FY18, both in numbers and amount. The fraud cases had hovered around 4,500 in the previous 10 years and the amount involved was increasing gradually but there was a sudden spurt in both in FY18. Its latest annual report says, 7,363 banking fraud cases were registered involving swindling of ₹1.38 lakh crore in FY21 alone.

How wise is it for the SEBI then to abandon the reform which would have made such frauds difficult and ensured Indian companies adopting global best standards in corporate governance?

Chitra Ramakrishna and her Himalayan conman yogi

The inability to ensure good corporate governance go beyond ensuring separation of power in listed entities. Its February 11 order against Chitra Ramakrishna, former MD and CEO of the largest stock exchange NSE, and others, is astounding.

Ramakrishna was removed from NSE in 2016 — nearly six years ago — for co-location scam and abuse of power. SEBI concluded its investigation in 2022 and issued its final order which exposes, in equal measure, its own failures to provide effective checks and balance as the top market regulator.

The order says Ramakrishna was found passing critical and internal “confidential” information about the functioning of NSE to an “unknown” yogi. Ramakrishna herself told SEBI on April 14, 2018 that this yogi “is the Siddha Purusha/Yogi i.e., a Paramahansa who maybe largely dwelling in the Himalayan ranges”. The information passed to this “unknown person”, through numerous emails mentioned in the order, relate to “organisational structure (of NSE), dividend scenario, financial results, human resources policy and related issues, response to regulator etc.” and also NSE’s “5-year financial projections... NSE’s business plans, agenda of NSE’s board meeting and consultations over the ratings/performance appraisals of NSE employees”.

Its order also notes that this “unknown person” had “significantly influenced the decision making” by Ramakrishna during her tenure as the NSE MD and CEO. It does surmise that the “unknown person” is none other than Anand Subramanian, her close associate by citing the mails and forensic findings by the Ernst & Young in 2018. The order also points out that Subramanian was appointed by her to key positions at “an exorbitantly higher compensation/salary package” even though he had “no relevant experience for the position he was being appointed”.

Yet, the SEBI order remains vague about the Himalayan yogi’s identity, doesn’t find out his motives, or prosecute him. Not even an FIR was lodged with police (cyber cell) to reveal the real person/persons behind the “unknown person”. A simple FIR and interrogation of Ramakrishna by police would have revealed the identity and what was the intended use of the critical information she passed on. It doesn’t find major problems with Ramakrishna’s unprofessional, and even criminal, misconduct and the gross failures of the NSE to check and take effective counter measures for several years. The penalties imposed on Ramakrishna and NSE are minor and restraints put on the former seemingly disproportionate to the professional misconduct as detailed by Fortune India earlier (“SEBI order in NSE's Chitra Ramkrishna case is a job half done”).

It would be naïve to assume that Ramakrishna’s misconduct was a case of individual eccentricity or deviant behaviour that frequent references to “psychology report”, “psychology expert” in SEBI’s order may suggest. Rather, it is more logical to assume the involvement of politically powerful individuals and the murky affairs in the largest stock exchange and the top market regulator.

Going by the facts mentioned in connection of both the cases, it is SEBI which comes out in a very poor light. It neither gives the impression of being independent of political influence or effective in providing the checks and balances. It is a gigantic institutional failure that should cause immense concern.

Top regulators like SEBI and NSE must be independent, and guided by professionalism, relying on expert views instead of “unknown” yogi from the Himalayas. Else, it is difficult to imagine India emerging as an economic superpower and the business destination for global capital and technologies.

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