SEBI is hell bent on making the corporate governance norms more and more tough. Its silence about United Bank of India saga shows how bogus its avowed stance is
On 13th February, the Securities & Exchange Board of India (SEBI) revised its corporate governance code, for the third time, making it stricter. The new code, effective October 2014, expects to ‘empower the board’ to ensure legal and ethical conduct of management. It also wants the board to evaluate, reward and, if necessary, remove senior management and ensure succession planning. The code, says an academic’s review, will create an ‘empowered board’ that is always vigilant, as opposed to a ‘passive board’ that usually gets active only during a crisis.
This strict code, with many laudatory provisions, will apply to all companies listed on our stock exchanges. Or will it? Look closely, and you can see that none of the new provisions will apply to the entire swathe of listed public sector undertakings (PSUs) that have inflicted big losses on investors. This is evident from the fact that neither SEBI nor the stock exchanges, who administer the corporate governance code through their listing agreement with companies, have uttered a word about the goings on at United Bank of India (UBI) that have mauled its share prices.
On 22nd February, its chairman & managing director (CMD), Archana Bhargava, suddenly opted for voluntary retirement citing health reasons. The finance ministry instantly accepted her application and allowed her to vanish from public view; she has not responded to our queries.
Ms Bhargava was allowed to opt for voluntary retirement after Reserve Bank of India (RBI) governor, Dr Raghuram Rajan, formally asked the government to remove her and supersede the entire board of the Bank.
Four days after Ms Bhargava’s exit, UBI’s board remains paralysed and unclear about its own future; the Bank is being jointly run by two executive directors. Anonymous sources, quoted in media reports, say that the board is unlikely to be superseded, despite the banking regulator’s recommendation, because it is a ‘politically sensitive time’. So, how will SEBI’s new corporate governance code help UBI investors who, at the very least, are entitled to a proper disclosure of facts from the board of directors? Do PSU boards have truly independent directors or empowered audit committees? Will they be exempt from the tough new norms and punishments prescribed by the SEBI code and the new Companies Act? The answer is: Yes.
Someone like Rajiv Takru, secretary (financial services), ministry of finance, will always call the shots at listed PSU banks. Management succession and remuneration will never be within the purview of these boards; but government appointees will continue to wield enormous influence on behalf of their political masters, crony capitalists and influence-peddlers. Investors, like those of UBI, who have lost over 70% of the value of their holding—the share price declined from Rs85 in January to around Rs25 (at the time of writing)—won’t even know who to demand answers from. Their source of information will continue to be media reports quoting anonymous sources.
Consider another angle. Reliable sources in the banking industry and the Bank say that Ms Bhargava may have exaggerated the bad loans below Rs10 lakh. For this, she blamed the core banking software (supplied by Infosys Ltd) which was unable to detect these. She is also accused of reckless lending by her own senior officers. These sources say that she was bent on declaring the entire portfolio, running into over Rs2,000 crore, as non performing assets (NPAs), which is a huge exaggeration. Many of these loans, they say, are likely to be written back in the coming months. If this happens, the share price may rise and investors who sold in a panic have reasons for serious complaint. Who will SEBI hold accountable? The passive board which does not even know its own fate? The government, as owner of UBI, for failing to make full and proper disclosures to shareholders? The RBI, as banking regulator, which remains secretive and does not disclose the true state of UBI’s finances or respond to rumours about merging the Bank with a stronger one? Clearly, the accountability of PSU bank boards or management is a hoax on investors.
If corporate governance norms do not apply to giant PSUs, or make a difference to politically connected companies like Kingfisher Airways, LANCO (of pepper spray in parliament fame) or NDTV, what is the purpose of tinkering with the rules? Our regulators, like our investigation agencies, will nitpick on compliance and harass companies who follow the rules or are not powerful enough block action. The same regulators will maintain a studied silence over the massive rise in bad loans of public sector banks that have even caused their unions to panic. SEBI is also silent about the misuse of funds by large corporate houses that use their political clout to get bad loans restructured repeatedly.
Here is yet another aspect to the governance conundrum in PSUs. In just over a year at UBI, Ms Bhargava precipitated a crisis by antagonising her entire board of directors over declaration of higher NPAs. She wrote to RBI asking for a forensic audit of UBI’s loans, since neither the RBI inspection nor the Bank’s external auditors had recognised the true extent of the rot in the Bank. Bad loans at the Bank trebled—from Rs2,964 crore in March 2013 to Rs8,546 crore in December 2013. The Bank, which was ‘profitable’ until the first quarter of 2013-14, reported a Rs489-crore loss in the second quarter which spiralled to Rs1,238 crore in the December quarter. Was this an accurate representation of the Bank’s finances? Nobody knows. The RBI governor’s letter, recommending Ms Bhargava’s removal, suggests that it does not see her as a crusading clean-up agent. However, our sources say that there is, indeed, a big increase in bad loans at UBI; but this is in line with those of all public sector banks. They also agree that much of her provisioning was high and, probably, exaggerated.
In fact, SEBI has allowed it to become a tradition for incoming chairmen at PSU banks (including State Bank of India) to declare higher NPAs so that their own performance shines in comparison to their predecessor’s. In a listed company, this would amount to a deliberate attempt to depress the stock price and ought to be investigated under price manipulation and insider trading rules. Will SEBI dare to launch such an investigation and initiate action? Or will Archana Bhargava and the UBI board of directors be allowed to fade away without accountability for her actions or consequences?
Let us now look at another aspect of how UBI and other listed PSUs make a mockery of SEBI’s corporate governance code. The universal view at RBI and UBI is that Ms Bhargava had extremely poor people skills and rode roughshod over her board of directors and senior management. However, neither shareholders nor employees have a say in the selection process.
Everybody knows that most appointments (barring rare exceptions) as bank chairmen are the result of hectic lobbying and dubious deal-making with corporate houses, brokered by notorious chartered accountants who turn up as finance ministry appointees at many banks. So Ms Bhargava, despite her patchy track-record at Canara Bank and Punjab National Bank about the quality of loans and other transgressions, apparently managed to bag a coveted assignment.
When hundreds of listed government companies (representing the largest block of assets) have no control over the appointment of their board of directors or their chairman and managing director, how fair is it for SEBI to keep making corporate governance rules more onerous?
Sucheta Dalal is the managing editor of Moneylife. She was awarded the Padma Shri in 2006 for her outstanding contribution to journalism. She can be reached at [email protected]
It is never too late to buy the latest and most modern equipment available, to get the job done in the Railways and the funding through FDI can help in this
Recently, Moneylife carried a story on the prospects of foreign direct investment (FDI) in the Indian Railways. As mentioned therein, the Department of Industrial Policy and Promotion had felt that the Railway Ministry's response to the draft cabinet note was confusing and therefore, it needed some more clarifications before further action could be taken. This is likely to take some more time, but in the meanwhile, it would help matters to review and consider what areas FDI participation would truly help India.
According to information available, rail wagons are designed to carry a load of pre-defined capacity plus nine tonnes with leeway to load one more tonne without any overload penalty across the entire railway network, as per the interim budget, presented recently.
The average load carried per wagon is about 62 tonnes though some wagons carry about 67 tonnes. As per a railway official, as reported in the press, a capacity creation of 15 million tonnes (mt) will account for about 30% of the 50 mt incremental loading that the railways aim to move during 2014-15. They have set a target to achieve 1,101 mt of cargo to be moved in this fiscal year.
However, in order to carry higher load per wagon, the Railways need to invest in wagons, improve rail tracks and bridges. For this purpose, Railways propose a market borrowing of Rs12,800 crore against Rs14,000 crore last year, to procure rolling stocks, including wagons, locomotives and coaches. Should the need arise, they will revise the target and borrowing accordingly.
One of the biggest problems that Railways have faced continuously is the issue relating to extension of rail-track laying, for which there are no indigenous technology or capacity. In fact, worldwide, there are only a few companies who can do this job meticulously and who are in great demand. The three principal companies are reported to be Harsco Corporation of the US, ETF of France and China Railway Shanghai Design Institute Group Company. The railway track laying machines are manufactured by the above three major companies, who, on obtaining overseas contracts, bring in their equipment, lay the track, complete their job on schedule, and take back the equipment, to another location for a new assignment!
Readers may recall that for the Eastern Railway Freight Corridor, according to information available, there are 16 bidders, both Indian and foreign, but most of whom have taken supporting bids from two of the above named specialists in the field. This corridor is likely to be completed in four years' time after the award.
According to an official of the Railways, as reported in the media, there are 35,000 route Kms that cover 70% of rail lines engaged in carrying freight allow for higher carrying capacity. The load per wagon will increase only by about 2 tonnes, as the routes currently permit 2 tonnes less loads per wagon. But to do so, Railways will have to make an incremental investment of Rs2,000 crore to replace old tracks and engage in upgrades in some areas.
With these data in the background, it is hoped, that when the final directives are outlined for the FDI in Railways, the following factors will also play a vital role in the development:
a) to engage in serious joint venture discussions to actually start manufacturing the track laying machinery in India itself - need and scope for continuous exists for a few decades to come;
b) to have a separate joint venture with the same FDI (or the second company) to take contracts for fresh track laying and to renew the old and worn out ones that need to be replaced for improvement and safety;
c) to have a separate organisation only for maintenance and repairs of all railway tracks in the country
d) current passenger coaches are mostly (almost 95-98%) in single decks only; double-decker passenger coaches area novelty; since in many areas the traffic is high, double-deckers would help faster movement
e) if Railways do not have a separate division for procurement of land in the proposed areas for laying tracks and stations, this should be established as a separate entity
All these and more and innovative ideas will take at least a decade or more to accomplish, but it is time we set the goals right and focus to reach those objectives. Just in passing reference may be made that a few years ago, these track laying machines cost between Rs10 crore and Rs30 crore, and why these were not purchased by the Ministry of Railways is a serious issue that they can only answer, since these would be more expensive now. But it is never too late to buy the latest and most modern equipment available, to get the job done!
(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.)
As transparency increases and blockbuster drugs lose patent protection, drug companies have dramatically scaled back payments to doctors for promotional talks. This fall, all drug and medical device companies in the US will be required to report payments to doctors
Some of the US’ largest pharmaceutical companies have slashed payments to health professionals for promotional speeches amid heightened public scrutiny of such spending, a new ProPublica analysis shows.
Eli Lilly and Co.’s payments to speakers dropped by 55 percent, from $47.9 million in 2011 to $21.6 million in 2012.
Pfizer’s speaking payments fell 62 percent over the same period, from nearly $22 million to $8.3 million.
And Novartis, the largest U.S. drug maker as measured by 2012 sales, spent 40 percent less on speakers that year than it did between October 2010 and September 2011, reducing payments from $24.8 million to $14.8 million.
The sharp declines coincide with increased attention from regulators, academic institutions and the public to pharmaceutical company marketing practices. A number of companies have settled federal whistleblower lawsuits in recent years that accused them of improperly marketing their drugs.
In addition, the Physician Payment Sunshine Act, a part of the 2010 health reform law, will soon require all pharmaceutical and medical device companies to publicly report payments to physicians. The first disclosures required under the act are expected in September and will cover the period of August to December 2013.
Within the industry, some companies are reevaluating the role of physician speakers in their marketing repertoire. GlaxoSmithKline announced in December that it would stop paying doctors to speak on behalf of its drugs. Its speaking tab plummeted from $24 million in 2011 to $9.3 million in 2012.
Not all companies have cut speaker payments: Johnson and Johnson increased such spending by 17 percent from 2011 to 2012; AstraZeneca’s payments stayed about flat in 2012 after a steep decline the previous year.
ProPublica has been tracking publicly reported payments by drug companies since 2010 as part of its Dollars for Docs project. Users can search for their doctors to see if they have received compensation from the 15 companies that make such information available online. (We’ve just updated our application to include payments made through the end of 2012, totaling $2.5 billion. Forest Labs, which only began reporting in 2012, reported speaking payments of $40 million, more than any other company in Dollars for Docs.)
Some companies in the database said their declines have less to do with the Sunshine Act and more to do with the loss of patent protection for key products. Lilly, for example, began facing generic competition to its blockbuster antipsychotic Zyprexa in late 2011. Its antidepressant Cymbalta lost its patent at the end of 2013.
“The value of educational programs tends to be higher when we’re launching a new medicine or we have new clinical data/new indication,” Lilly spokesman J. Scott MacGregor said in an email, adding that the drop in speaking payments also reflects the increased use of web conferencing.
Pfizer’s patent on Lipitor, its top-selling cholesterol drug, expired in 2011.
“Like any other company, our business practices must adapt to the changing nature of our product portfolio, based in part on products going off patent and new products being introduced into the market,” company spokesman Dean Mastrojohn said in an email.
Novartis’ patent for its breast cancer drug Femara expired in 2011, its hypertension drug Diovan in 2012 and its cancer drug Zometa in 2013. In a statement, Novartis said that speaking payments dropped in 2012, in part, because of a shift from big blockbuster drugs that many doctors prescribe toward specialty products prescribed by fewer physicians. Resources were also shifted “to support potential future product launches.”
The industry’s increased emphasis on expensive specialty medications for such conditions as multiple sclerosis or Hepatitis C, has been striking, said Aaron Kesselheim, an assistant professor of medicine at Harvard Medical School. A piece in the New England Journal of Medicine last week noted that half of the 139 drugs approved by the Food and Drug Administration since 2009 were for rare diseases and cancers.
“It’s possible the number of physicians they need to support sales of these items is less, leading to lower payments overall,” Kesselheim said.
In some cases, companies maintained or made smaller cuts to other forms of physician compensation while pulling back dramatically on speaking payments. Pfizer’s spending on consultants dropped 9 percent from 2011 to 2012, far less than its payments to speakers. The company’s spending on research stayed essentially the same.
Lilly increased spending on physician researchers by more than 20 percent, while reducing payments to consultants by more than two-thirds.
Many bioethicists and leaders of major academic medical centers frown upon physicians delivering promotional talks for drug companies, saying they turn doctors into sales representatives rather than leaders in research and patient care.
Officials with the Pharmaceutical Research and Manufacturers of America, the industry trade group, dispute this characterization. They said they are working with their member companies to prepare for the Sunshine Act and have created a campaign to promote the value of drug company-doctor collaborations.
“Companies will make their own independent decisions about how to engage professionals,” said Kendra Martello, PhRMA’s deputy vice president of strategic operations.
Scott Liebman, an attorney who advises pharmaceutical companies on the Sunshine Act, said it’s too early to know how much the law’s requirements are affecting company practices, in part because it’s so new. The fact that some companies are cutting back on speaking while preserving their spending on research and consulting suggests that other business forces could be at play, he added.
“It’s very hard to pinpoint exactly why that’s happening,” Liebman said. “I think there’s a lot of potential answers to that. I just don’t know which is the right one.”