Interview: Meleveetil Damodaran, Former Sebi chairman
Also credited for scripting revival of troubled institutions like IDBI and UTI, former Sebi chairman Meleveetil Damodaran, in his new role as the founder chairperson of niche corporate governance advisory firm, Excellence Enablers Private Limited, is actively working on improving the corporate governance standards in the country. In an interview, Damodaran tells Ashwin J Punnen that governance standards will improve only when big companies, both public and private, lay down right standards and right values to address the interest of all stakeholders
Over the past two decades, a lot of work has been done to improve the corporate governance standards in the country. How comparable are our governance standards to the developed world today?
Corporate governance will always be a work in progress. As you identify new problems and new challenges, you have to put in place new regulations if not certainly better regulations.
Regarding where are we in relation to other countries, those that are doing very well in governance, the answer is we are not there yet. But we have made some progress. One thing that we are grappling with, is the fact that the shareholding pattern in India is different from the shareholding pattern in the US. Here we have a very large number of majority shareholders, whether private or public. Our regulations have been premised on the Sarbanes Oxley Act and we reviewed Clause 49 based on the Narayana Murthy committee report.
When you have a disconnect between the shareholding pattern and the regulations, you have seeds of problem. We are trying to improve by making some changes. Somebody is holding 55 per cent shareholding whether he has independent directors or not, and when it comes to vote he gets away with it. It works if the independent directors find that the company is doing something wrong and these directors tell the company that they can’t do it. If the company doesn’t listen then they should step down, which will affect the reputation of the company if the issue comes into public domain.
But we have situations where no matter what the independent directors do, the company has its own on way. This happens typically in government owned companies where whatever the government nominee says is the law; no matter whatever the independent directors say.
We should see big companies both private and government lay down the right standards and right values to address the interest of all stakeholders. Only when that happens, will we get better corporate governance.
What will drive that change?
People will have to recognise that if a company has to exist for a long time, you would need good governance practices. A company may be doing well in its business and its stocks may be performing well, but if it doesn’t have good corporate governance practices then it would not last for a long time. Somewhere along the way the company will fold up.
If the problem is high promoter holding, then how did a professionally managed company like IL&FS run into trouble with poor corporate governance practices?
There the problem was that the board did not act on the information that it had — that the company was in bad shape. These are experienced people who should have acted. They knew the nature and extent of the problem. And they did try to work on some solution. Like bringing in an investor from the outside. For some reason it didn’t go through. So the defaults kicked in. Not that they didn’t do anything. It is actually not the failure of the board refusing to act. What they attempted to do, didn’t work out.
The reason is that the business model was flawed from the beginning. You can’t have a business model that raises this kind of debt and a complicated structure of so many subsidiaries. Here you lose focus. In fact, the auditors should have raised the alarm. Some action should have taken place five years ago.
We have seen several institutional failures over the years and you were involved in two revival operations. Why have no lessons been learned?
These are different kinds of problems. Take the UTI case for example. My predecessor was charged with some Rs 32 crore investment in some company. The real issue was that you have this massive scheme US 64 where you had administered sale and repurchase price. And it kept increasing regularly. When you are repurchasing units at Rs 13-14, the intrinsic value of which is Rs 6 or Rs 7 then every investor that takes out that one unit takes away Rs 7 more than what he should have got. Who pays the price? Then to compound the problem in US 64, you had several assured returns scheme called MIPs, where both the capital was assured and returns were assured. Many of these were not performing but there was commitment. Here you had schemes which were badly designed. The US 64 should have been a NAV based scheme 10 years before the problem started. It was a flawed scheme. Many people were raising money from UTI at 14 per cent and these people were investing the same money in US 64 and getting 22 per cent returns. Then there were credibility issues. So we had to take some tough decisions to bring back confidence among investors. We didn’t want the market to get the feeling that UTI will sell shares and depress the stocks further. Then we divided it and made two sets of schemes. The NAV-based schemes were put into the AMC and the assured return schemes were in SUTTI. This was the first bailout case in world economic history, when the government without putting in a single penny made thousands of crore. Many people think that the government gave money to UTI but it gave nothing. We issued bonds on government guarantee and the minute we issued bonds, we didn’t have to sell the stocks because the stock prices started recovering. And because it gave the guarantee, the government converted itself into an owner. It was a unwretched enrichment for the government, it should have done it. We started by saying we would repurchase up to 3000 units, then increased it to 5000 units. Then we managed to close the scheme after repurchasing all the units.
IDBI’s problem was different. You had an institution which could not raise deposits because it was not a bank and you were competing with banks. If your cost of funds is high and the same people that the banks lend to are your target, why would they borrow from you. So the IDBI kept the lending rate high. And nobody borrowed from it. I reduced the lending rate by 225 basis points from 12.5 per cent to 10.25 per cent in one meeting. Then the people started coming. Having competitive rates.
On the assets side stressed assets stabilisation fund was created where Rs 9,000 crore assets were parked in the fund and cleaned up our assets side. Then we did the merger with the IDBI Bank, and got access to low cost capital. It was the perfect solution. I hate to say that the model that I had put in place — SPVS or project finance for companies and treasury and other activities. There were people of different age profiles, different qualifications and pay scales. My idea was to keep it separate for five years and over a period of time, do the merger. In any merger, people are a big issue. Take for instance the Air India-Indian Airlines merger, no one cared to look at how you will the people be integrated.
How can we avert such massive collapses?
The boards should be vigilant. Board committees should be vigilant. Management should be vigilant. No management wants things to blow up in its face. You got to look for early warnings signals. If you are a bank, then you have to be in touch with your customers. When problem NPAs in PSU banks came up, everybody was talking about the bad assets, but what about the standard assets which were on the border that was likely to slip. You need to stop it. These are not insurmountable problems, if somebody wants to fix.
What should be the role of independent directors — that of a watchdog or a mentor?
The Section 166 (2) of Companies Act says every director is responsible for the company as a whole and all its stakeholders, especially minority shareholders. It is not that you are sitting on the board as representative of minority shareholders training your gun on the majority shareholders; you are responsible for the business of the company. No matter whether you are an independent director or nominee director. If that is the basic law then you must conduct yourself in a manner which will be good of the company. You cannot say that I will only focus on this interest or that interest. When you are on the board, the interest of the company is most the important thing.