Independent directors/auditors-not busines advisors but rats ditching sinking ships

Whether it be Money Matters, SKS Microfinance, Satyam or companies caught in a legal/regulatory tussle, a few things inevitably happens. The auditors resign/refuse to seek reappointment, and so do the independent directors. This was evident during the Money Matters case(top executives of the company were accused of bribing loan sanctioning officials for seeking loan approval of their clients). The scam broke out in Dec-10, and within a month, the statutory auditor AND the independent directors resigned, leaving the others to bear the brunt. Now, I understand that noone like to be associated with failure. But the reason for resigning certainly is not due to professional grounds. If they had tried to bring changes within and failed, then I would understand. But abandoning a scam hit company, at the time it needs third party help the most, is quite unethical, to say the least.

During every corporate governance debate etc, it is alleged that Indian companies are 'family run' and not 'professionally managed'. The hypothesis is that when owners take a back seat leaving the steering to professional management and independent directors, it is best for the company. But, these are the very people who will abandon ship at the first sign of trouble. Right from the junior employees to the senior CEO level guys, they have little invested in jumping ship. No wonder then, that 'seth companies' may prefer loyal employees from their own region/language etc, who will stick with them through thick and thin. Same for independent directors also.

Now, auditors are not really expected to advice the company, except maybe on improving its controls. But independent directors have a fiduciary duty to the shareholders(besides the company itself). At times when promoters are arrested(like Money Matters/Unitech), it gives independent directors a golden opportunity to step up to the plate, take control and prove their worth. But no, the gutless wimps prefer to resign. If like in Satyam, they had acquiesced in the events leading to disaster, then I can understand(they have no moral right to stay on then), but otherwise it is quite timid of them to resign. 
Takeaway: Show me 1 company whose existing  independent directors steered it from crisis to renewed success. The fact that one is hard pressed to think, proves my point.

How small retail investors are getting screwed in both debt & equity

For the purpose of this post, I'll follow the SEBI definition of retail investors as someone who invests upto Rs 2,00,000 in investments annually(actually SEBI has that limit per IPO but given Section 80C etc, the Rs 2,00,000 limit is probably reasonable per annum).

The Finance Ministry recently appointed a committee on small savings, to revamp the whole system. A key recommendation was linking the interest rates on small savings, to the market determined curves. Even though the recommendation has inbuilt safeguards like limiting interest rate volatility to +_ 100bps/annum, it will still result in less money for the investors. At a point where we are giving incentives to big investors via tax exemptions, FDI relaxations etc, it does not seem fair to reduce the interest rates for only these people. Read the whole report here- www.finmin.nic.in/reports/Report_Committee_Comprehensive_Review_NSSF.pdf


On the equity front, things are not much better. Financial Reporting requirements have become laxer. While some rule relaxations prevent wasteful reporting/printing(for example no need to attach subsidiary annual reports by default if you are presenting audited consolidated financial accounts), other points like 'opt out' emailing of annual report/accounts to shareholders, is a point of concern. All these years, SEBI had recommended that companies should quickly upload the annual report on their websites, but most companies had turned a deaf year. Finally, when SEBI made it mandatory for Stock exchanges to make this information available on their sites, the Ministry of Company Affairs woke up and decided to allow companies to send the annual report to the registered email address of their shareholders. But this comes without a mandate for them to upload it on their sites OR send it on request to the public. After all, stock markets are supposed to help even prospective investors, yet they often have to rely on private services to get the annual reports of smaller companies. Will this situation change? Another point of concern is the relaxation of segment reporting(quantitative and some other details no more needed) and the enhanced ceiling(from 2lakh/month to Rs 5 lakh/month) for identifying highly paid employees. All these points affect all investors, but institutional investors/analysts can access companies directly, which the retail investor mostly cannot.