Wake up call for India Inc

Uday Chatterjee
01 April 2003

Mumbai: Despite welcome sops offered to India’s capital markets in this year’s budget, the bourses have not responded in a gung-ho fashion as expected and the investor, particularly the small investor, is still avoiding the capital market.

Apart from the ongoing US-led Iraq war, the main reason for the low investor interest is the doubt in his mind whether companies are following good corporate governance (GCG) practices.

The lack of GCG practices leaves the investor in an uncertain frame of mind about a company’s promoters and management. The investor has now realised that the main reason for the spectacular fall of once-deified companies like Enron and many others was basically that they did not follow GCG practices.

GCG practices essentially mean good management. Such practices are not just for the benefit of shareholders but other stakeholders of a company — like the company’s creditors, vendors, employees and, last but not the least, customers, whose stake, though intangible, is of vital importance.

To illustrate, not having GCG codes and practices would mean that the shareholder is told that the company is making profits while actually it may be making losses. The company’s bankers are assured that their monies are not being diverted while in actuality they may be have been siphoned out.

The vendor, often a small-scale unit in India, is unsure that payments will be made on time. The plant manager of the company is made to make false certifications that the mineral water manufactured in his plant is according to laid-down standards. Lastly, the customer is led to believe that the mineral water he is consuming is according to standards while actually it is not.