Weak governance continues to haunt Indian boardrooms

Gautam Thapar, head of Avantha Group, was arrested by ED on charges of money laundering (Photo: YouTube)

Earlier this week, Gautam Thapar, head of Avantha Group, a paper, power and real estate conglomerate, was arrested by the Enforcement Directorate on charges of money laundering. Thapar was arrested following an alleged property transaction where Thapar’s firm ‘gifted’ INR 3 billion bungalow to YES Bank’s co-founder Rana Kapoor and his wife in exchange for INR 19 bn loan to Thapar’s struggling realty firm, Avantha Realty.

Earlier, in June, another investigation agency, Central Bureau of Investigation, had booked Thapar for bank frauds in two bank loans. One related to loan of INR 4.66 billion from YES Bank and the other of INR 24.35 billion from consortium of banks led by the State Bank of India.

In an unrelated development, one of world’s largest brewers, Carlsberg, is entangled in a boardroom battle with its Indian partners over the business practices of Carlsberg India, its joint venture with Nepal-based Khetan Group. The battle came out in open this week as in its first public comment since the dispute began, Khetan’ urged Carlsberg “to honour its obligations to improve governance and act in the long-term interests of the business”.

Carlsberg, which has 17 pc of the USD 7 billion beer market in India, said that it had taken steps to improve governance in India and bring it at par “with the high standards governing the other companies across our group”, adding caustically that “Unfortunately our JV partner has not always been a constructive partner in these efforts.”

The Khetan group entity said in its statement that suspected governance issues prompted the resignation of Carlsberg India’s auditor and an inspection of its accounts by Indian authorities.

It added that for several years it had consistently expressed grave concerns over suspected irregularities and illegalities at the joint venture company’s India business.  Carlsberg said it was not surprised by the move. “As the commercial conflict with our JV-partner continues, we are unfortunately not surprised that our JV-partner and his representatives continue to share wide-ranging accusations,” Carlsberg said in its statement.

Wherever the blame lies, something is very wrong with Carlsberg India as its global auditor, PriceWaterhouseCoopers, resigned from its position in India last year after it declined for two successive years to give an opinion on the joint venture’s financials.

Carlsberg is also facing scrutiny from India’s antitrust authority whose investigation found in 2020 that the company colluded with other brewers to fix beer prices. Carlsberg’s own internal investigations found potential improper payments to government officials, read bribes, and other lapses, while another found child labour issues at one of its warehouses.

Toothless market regulator?

But perhaps the most brazen misgovernance and highly questionable practices may have occurred at a state-owned housing finance firm and a private sector behemoth whose owner is not just India’s second richest man but also extremely close to Prime Minister Narendra Modi. In both instances, the stock market regulator Securities and Exchange Board of India (SEBI) had initiated enquiries and actions against the firms, but to no avail as the controversial deals still went ahead and both the corporate houses seem to have gotten away scot-free.

A few weeks ago, the SEBI raised objections on move by PNB Housing Finance, a subsidiary of the state-owned Punjab National Bank, to issue preferential equity shares and warrants to Carlyle Group, an American private equity firm, and others on hold until valuation of the shares is carried out by an independent registered valuer.

SEBI initiated the action after a proxy advisory firm, Stakeholders’ Empowerment Services (SES), raised questions over the proposed transaction, terming it “unfair” to the interests of minority shareholders. The transaction in question involves the issue of INR 40 billion preference shares to a group of investors led by Carlyle. With this transaction, the group’s shareholding in PNB Housing would rise to over 50 pc and a controlling stake.

The objection against the issuance of preference shares was both on the issue itself and the price of the shares. SES told SEBI that a preferential issue was discriminatory since it barred other shareholders from participating and SES said the price should have been higher as the transaction changes the nature of the company — effectively transforming it to a privately controlled entity. It said that the fact that share price of PNB Housing Finance on the markets has soared signals how the market valuation of the company went up due to this event.

These were perhaps key lapses in transparent governance, but the biggest issue involves the fact that of the 12 PNB Housing Finance board members who approved the transaction with Carlyle, seven had past dealings with the Carlyle group, raising immediately the issues of conflict of interest and protection of minority rights, two key factors in corporate governance.

Of the 12 members, two are Carlyle employees and are nominee directors by virtue of the firm having a 32 pc stake in the company. Five others had clear dealings with the Carlyle Group in recent past. All of these have been documented by a leading daily newspaper and hence would normally have led not just to a cancellation of the entire transaction but also filing of criminal charges against the guilty directors who okayed the deal, despite knowing the conflict of interest and the loss to minority shareholders caused by the transaction.

However, regardless of the highly clouded deal and the serious nature of objections, the Securities Appellate Tribunal overruled SEBI and allowed PNB Housing Finance to proceed with the transaction.

Another very bizarre development involving a ruling by SEBI occurred earlier this month with some companies of the Adani Group, run by Gautam Adani, whose prospects and net worth have zoomed incessantly since the arrival of the Modi government. This year Adani topped the global list of billionaires whose wealth rose the most in the first quarter.

Earlier in July, shares in six firms of the group fell sharply after reports that accounts of three foreign portfolio investor funds had been frozen due to irregularities. Minister of state for finance Pankaj Chaudhary made a statement on the issue in the Parliament saying that some Adani companies were being probed by SEBI over compliance with securities rules.

Besides Sebi, Directorate of Revenue Intelligence is also “investigating certain entities” belonging to the group for compliance to another set of laws, the minister said, without elaborating on the investigations or name the group companies.

The Adani Group rejected reports about the National Securities Depository Ltd (NSDL) freezing the funds’ accounts as “blatantly erroneous” in identical statements issued to stock exchanges.

The NSDL website showed it had frozen as of May 31 the accounts of Albula Investment Fund, Cresta Fund and APMS Investment Fund without citing a reason.

The freeze caused a sharp fall in Adani Group shares, with almost USD 6 billion, wiped off their valuations. However, three weeks later, the situation remains cloudy as neither the regulator, the government nor Adani Group have clarified the issue, besides a denial that Adani Group companies were involved in the freeze. And casting this blip aside, the Adani Group marches on towards greater accumulation of power.