Former Sebi chairman M Damodaran criticised a recent directive from the capital markets regulator, Sebi, labelling it inconsistent and laughable. Speaking at an event by the Institute of Internal Auditors, Damodaran highlighted that good governance cannot be achieved through prescriptive measures. He stressed that such practices should originate internally within companies.

Concerns Over Governance Standards

Damodaran expressed concerns about the directive issued on February 14, which outlines industry standards for minimum information required for audit committee and shareholder reviews of related party transactions. He described the document as overly detailed, with a lengthy tabular statement. “If you take them seriously, you will have a problem. So it’s better to read them, laugh at them and go on with life,” he remarked.

The former regulator pointed out inconsistencies within the document itself and with other guidelines from Sebi. He also emphasised the need for state-run companies to enhance their governance practices. Damodaran noted that promoters’ influence should not hinder companies from adopting good governance practices.

Challenges in Compliance

Damodaran highlighted that compliance is often viewed as an expense rather than an investment in a company’s long-term survival. He advocated for clear reporting lines where internal audits report directly to the board’s audit committee instead of the chief financial officer. This approach, he suggested, would strengthen governance structures.

He lamented that some large public sector companies still violate regulations requiring women independent directors on their boards. “So much for the climate in which governance is practiced,” he commented, underscoring the need for improvement in this area.

The Role of Independent Directors

Damodaran underscored the importance of having reputable independent directors on company boards. He cited the Satyam case, where independent directors supported poor decisions despite raising relevant questions. “You need good independent directors on your board to save the promoter from himself or herself,” he stated.

He warned that without competent board members, promoters risk self-destruction due to numerous temptations. Damodaran advised promoters to appoint capable individuals to their boards to safeguard their interests and ensure sound decision-making.

The former Sebi chairman’s remarks highlight ongoing challenges in corporate governance and compliance within Indian companies. His insights call for introspection and action to improve governance standards across sectors.