Former Sebi chief M. Damodaran calls for more regulatory impact assessment

“The markets have grown in complexity, in size, number of investors have increased, number of issuers have increased. There are external factors, not related to India, but impacting India. Many of these complexities did not exist about a decade ago. Sebi is not getting the credit for the kind of work that they are doing. They do not need advice, but in the excitement to do more good things, somewhere I think regulatory impact assessment should get factored into the decision-making process,” said former Sebi chairperson Damodaran.

He added that the market regulator had moved from a “distrust and crucify” approach to a “trust, but verify approach”, as he had suggested multiple times in the past.

When asked how the regulator could conduct such regulatory impact assessment in the light of modern technology, Damodaran said Sebi needs to communicate with the public and assure them that their interests are safe.

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“Perception is as important as reality. I have said in the past that Sebi does not come out int the streets and regulate in full public view. There must be something happening that you and I do not know about. They do not have a spokesperson the way other enforcement agencies do. What Sebi needs is a very calibrated communication package which does not advertise its own work, but at the same time gets across the message that investor interests are safe with us, and we are looking into the issues you face,” he said.

Corporate governance

Damodaran, currently the chairperson of corporate governance consultancy service Excellence Enablers, said that shareholders should not look to regulators to ensure that they are the true owners of a company. Instead, he suggested shareholders hold to account the board of directors, because the board of directors is appointed as representatives of shareholders. “If the board is doing nothing, then bring it to the notice of the regulator,” he clarified.

He added that the trend of directors individually, and boards as a collective, standing up to promoters in disagreement over certain corporate actions, has become more widespread — a positive sign. Following this, if they are unable to make a change in the boardroom, then they leave, Damodaran said. “Sebi has rightly mandated that when you leave the board, tell us why you are leaving. Don’t say you are leaving for personal reasons,” said Damodaran, adding that this rule is often not followed.

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As an independent director, Damodaran found it difficult to work with non-promoter directors compared to promoter directors. “I’ve had far less problems with promoter directors than with professional directors. People who are appointed to senior positions believe they own the place and the company and nobody else counts. If you look at the large companies with larger than life managing directors, you will get what I’m saying.”

Giving an example, he said, “I have come across promoters of large companies who actually reach out to directors, not even the new ones, Brijmohanlal Munjal for instance, whose board I served on, he would not clear a proposal on the board if the management brought it unless he looked around, saw whether the independent directors were happy and occasionally reach out to some of us for our views and you had the freedom to argue about it. So there is a difference between professional led companies and professionally led companies,” he added.

Damodaran said the role of proxy advisors in improving corporate governance in exaggerated. “Proxy advisors have a role in improving governance in the companies but I think their role is exaggerated. A lot of people look at them as the ‘great white hope’ for investors which they are not,” he said.

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“Some amount of self regulation is required from proxy advisory firms. What they need to do is look at what are they doing, are they doing enough to justify their place in the systems. Whatever you do, you must ensure that the ease of conducting business is not obstructed,” he added.

While Damodaran pitched shareholder activism, he said the activism done in foreign jurisdictions is not the same. “Activism is good. What you see in the US on occasion, is adventurism. We must draw that line,” he said.

Continuing on shareholder activism, Damodaran felt the closure note written by the founder of  US-based shortseller Hindenburg earlier this week was timed peculiarly. “I read the note shared by him (Nathan Anderson of Hindenburg) and he said a lot of things there. But why did he say this now and not the months earlier or six months later? Was there a reason? Suddenly is it that a business makes enough money and suddenly decides to leave or are there any other pressures, we don’t know,” said the former Sebi chairperson. 

“He might not have conducted himself well as a short seller but some of his research findings, you shouldn’t just discard… Maybe there are some things in the report that you can extract or use maybe not specific to the case, maybe in other context. So look for what you can find that is valuable and junk the rest,” he added.