Bonds, Currencies & Commodities
Corporate governance: ‘Transparency was all but missing’ in NSEL
The managing director went on record to say that NSEL has sufficient stocks in warehouses to cover the entire open exposure and in the event of any default, stocks will be sold to fulfill payment obligations. The hollowness of this claim is an open secret now.
 
“The Company’s philosophy on Corporate Governance envisages adherence to highest levels of transparency, accountability, trusteeship and ethical corporate citizenship in all areas of its operations and all interactions with its stakeholders” says Financial Technologies group corporate governance policy. The words like ‘Transparency’,’ Accountability’ ,’ Ethical corporate citizenship’ sound so unreal and utopian in context of what happened in National Spot Exchange(NSEL) which is a group company. Transparency was all but missing in the entire episode. The managing director went on record to say that NSEL has sufficient stocks in warehouses to cover the entire open exposure and in the event of any default, stocks will be sold to fulfill payment obligations. The hollowness of this claim is an open secret now. The first payment itself was a default. What about accountability? Dismiss some employees and accountability is over. No accountability for the man running the show behind the corporate veil. 
 
Now, look at the one of the most important pillars of corporate governance called independent directors. What were they doing? Should these directors have asked questions on at least the basis compliance processes being followed in the company? After all, corporate governance policy of FT group says,” Financial Technologies believes that the management is responsible to the Board of Directors and the Board of Directors is in turn responsible to the shareholders. And by having these accountabilities demarcated drives the Company both performances wise as well as in enhancing shareholders value”. What happened to the concept of independence and accountability? In fact, this is very weak area in the entire process of corporate governance. India lacks a pool of really independent directors and those act as being independent, are not welcomed by the company.
 
But Financial Technology is not just an example in isolation. There are several companies in India for whom corporate governance has become a cut and paste approach. It is just one more document in a series of documents that a company publishes. Nicely drafted words to show how the company cares about corporate governance policies. Look at Gitanjali Gem’s corporate governance policy which says that the corporate governance policy of company is based on following principles: (a) Satisfy the spirit of the law and not just the letter of the law; and (b) Be transparent and maintain a high degree of disclosure levels.
 
How can a company, claiming to satisfy the spirit of law, find that the main promoter of the company is banned by the capital market regulator for activities which are completely unlawful? Where is the implementation of the tall claim about its corporate governance policy? Is there any understanding about the claim that the company has made about its corporate governance policy? But who cares. After all this is a policy document which just needs to be added as a part of the document and what you need is just redrafting of the policy words to make your own policy as a company. To these words legal acceptability, a certificate of compliance on terms contained in clause 49 is required to be signed by the director and auditor/company secretary of the company.
 
Every listed company makes tall claims about taking care of shareholders interest and value, but the modus operandi of the company refutes this claim. FT group policy says “The main purpose of the Shareholder Grievance Committee is to look into shareholder and investor complaints and redress them in the best possible manner at the earliest”. But look at the way FT has dealt with shareholders in terms of clarifying their doubts. The shareholders have been suffering in the process of the entire crisis with the value of the company’s shares taking a big hit.
 
The corporate governance approach needs to change from a tick box approach and mere documentation. Basically, the new approach towards corporate governance should provide enough indication to the investors and potential investors if a company is found wanting in implementation of corporate governance policy. Inability to follow corporate governance practices should have provision for severe monetary penalty for independent directors and board of directors in general. Also, if there is any significant breach of corporate governance is found in one company, the independent director should not be allowed to act as independent director in other companies.
 

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COMMENTS

nagesh kini

4 years ago

The concept of CG is only for the records.
Despite the worse of practices, I've yet to see any auditors qualify their reports!
Why only NSEL?

KAVIRAJ B PATIL

4 years ago

In any other country having good governance, the company's board would have been facing lawsuits and a trial lasting around 6 months. In our country, even one year from now, the duped investors will still be found running for their money.

Railgate: Loss of Rs17,000 crore just tip of the iceberg?
The CAG discovered crores of rupees vanished at the Railways due to the twin-freight policy! There is a need to be practical in plugging loopholes in freight rate, which leads to such malpractices
 
The Comptroller and Auditor General (CAG) has discovered the tip of the freight iceberg when they carried out a test audit recently, according to media reports. Apparently, this has been going on for a couple of years now. Initial reports indicate that because of the existence of twin-freight rate policy, a large number of merchants have ‘managed’ to pay the lower rate on the pretext of supplies for domestic use, but actually used it for export shipments! The Railways charge lower rate for transportation of iron ore to domestic steel makers, and a much higher rate (three times actually) for export cargo. Incredible! India, at its worst!
 
This has been done without supplying mandatory documents, such as affidavits and indemnity bonds. According to CAG test audit, the recoverable freight dues, for actual export shipments effected, is estimated at Rs17,000 crore, which they suspect could be much more.
 
At the moment, multiple agencies of the Central Bureau of Investigation are working on this fraud on under invoiced freight (difference between export and domestic rates) that may show the recoverable freight could be in excess of Rs50,000 crore when the investigations are completed.
 
How the merchants of iron ore managed to get rakes and despatch the goods to its destination is a mystery and one can only surmise that this mammoth operation involving some 400 rakes, without ‘insider’ help, is just not possible.
 
CAG preliminary report indicates that a minimum of 126 parties obtained the rakes, without the proper documents and managed to lift and despatch the ore. This is only possible, thanks to the unstinted co-operation extended by railway staff in getting rake allocation, loading at site and moving the ore to its port destination for onward shipments.
 
Obviously, the whole bunch of staff at the port, from entry point to inspection, loading and verification of the required export documents have been in cahoots with merchants, for this to happen.
 
The CBI has been carrying out the investigations for sometimes now, and it will be a few months more before their findings are made public. CAG officials are firmly of the opinion that without the connivance of railway administration and the port staff, movement of such large quantity of ore is not possible.
 
At the moment, there is no export, due to the ban, but given the present state of affairs in relation to extremely difficult current account deficit (CAD) status, the Indian government may be forced to revive export, though the international market is also slack, but demand may begin to occur in the next few months.
 
Digressing for a moment, what will the CBI find? The most possible scenario is that many of the merchants may have simply vanished; companies have been sold to new owners; many may have benami owners; files and related documents missing at all important contact points and a few may eventually pay a fine or arrange for an ‘out of court’ settlement!
 
Railways need to pull up their socks. They need to be practical in plugging loopholes in freight rate, which leads to malpractices, such as these. First, we need to revive our export and it may be prudent to lower the transportation (freight) charges; second, our domestic industry is also in bad shape and needs revival and to encourage both to grow, why not average the freight rate so that there is no scope for this malpractice?
 
In addition, unless the mandatory documents are made available and bank guarantees are in place to cover the freight element, rakes should not be released and these again needs to be subject to surprise inspection and checks en-route and before entry to the prohibited port area. Such strict measures are likely to bring down the fraud that has now been discovered but the CBI must carry through their thorough investigations so that the guilty is severely punished.
 
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
 

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COMMENTS

Vaidya Dattatraya Vasudeo

4 years ago

Now we know which files are to be burnt next.

RBI compliances getting tougher for NBFCs
Last week, the banking regulator introduced ‘branch info’ return compliance for NBFCs. This new directive would surely curb speculative transactions as well, which otherwise are hard to track down
 
There were times when non-banking financial companies (NBFCs) had their own set of privileges over banks. The compliances laid down by Reserve Bank of India (RBI) were far more lenient for NBFCs than those for banks. But gone are those golden days and now even the NBFCs are under RBI’s continuous screening. Having said this, the new compliances for NBFC came from the famous Sahara Case. 
 
A series of compliances for NBFCs post the Sahara Judgment, in August 2012 have been prescribed. Few of the important guidelines are Securitisation of Standard Assets and Guidelines for Private Placement of NBFCs. Apart from these the RBI, in the recent past, kept sending notices to companies, asking to send their annual reports, to examine whether the company is an NBFC or not. By this, we can applaud the efforts of RBI for preventing speculation in NBFCs.
 
Introduction of ‘Branch Info’ return
 
Last week the RBI vide its Notification RBI/2013-14/219 came up with an additional compliance requirement for the NBFCs to adhere. This requirement deals with the returns to be submitted by the NBFC with respect to their branch offices. 
As written earlier, the RBI had many regulatory compliances imposed on NBFCs. However, till date there was no such compliance for the branch offices set up by NBFCs. This will now enable RBI to keep a check on the happenings of the branch offices of NBFCs.
 
Requirements under this compliance are as below:
 
All deposit-taking NBFCs and all non-deposit taking NBFCs having total assets more than Rs50 crore are advised as under:
 
1. Submit within one month from the date of this circular, information in respect of all their branches functioning as on 30 June 2013;
 
2. Thereafter, update on a quarterly basis, the details of the branches opened/closed during the calendar quarter. Such updating will be done within 10 days of the calendar quarter to which the information relates.
 
Further, till now only the NBFCs-D were to file the details of their branches through Form NBS-1. With the introduction of Branch Information Returns, both the NBFCs-D and the NBFCs-ND, having asset size of Rs50 crore, will now, have to give the details of their Branches. Thus, the existing form NBS-1, required to be filed by the NBFC-D, has been done away with. All NBFCs with specified asset size have to submit the new form.
 
Having laid down a systematic procedure for evaluating the NBFCs and their Branch Offices, this new compliance might tighten the working of NBFCs. But it would surely curb the speculative transactions as well, which otherwise are hard for RBI to track down.
 
(The writer can be contacted at [email protected])
 

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