IT’S TIME FOR THE ROC TO RISE AS A VIGILANT REGULATOR

Under the prevailing cloud of allegations about corporate frauds, I vividly recall a cover story that we did in this publication almost 18 months back (Statutory Compliance – A big joke, BFM May, 2011). Therein we analysed how the Registrar of Companies needed to act like a vigilant watchdog rather than being a toothless facilitator helping companies to get away with all sorts of corporate governance lapses. We further argued that such a passive approach on part of the RoC was allowing creation of dubious corporate structures providing a perfect recipe for the generation of black money.

There is no doubt that with 721,719 companies already registered (as on March 31, 2011) with the RoC and the number increasing by close to a lakh per year (in FY 2011), the task is daunting. But all it needs is a strong bureaucratic will to manage this menace. RoC is the first touch point for all companies when it comes to due diligence in cross checking the details submitted by the promoters. All it really takes is an initial physical verification of the addresses provided. It could be as simple as the physical address verification exercise undertaken by mobile service providers when we buy a sim card. This basic procedure has the potential of saving the nation from spectacular shocks in later days.

Moreover, RoC needs to be more efficient and techno-savvy to make the huge task a bit relaxing. For example, keeping a track of who is a director in how many companies is not an easy task. But technology can come in great use here. RoC can put up a system through which an individual’s details as a director are automatically fed into the records of RoC. This can be done by allotting an id unique to that director, linking back all his details to this single reference point. Every time an application is submitted for a director’s enrollment in a different company, the software would be able to pull up all archived data linked to this id. This will help the RoC keep track of companies and people, which under the current setup is a great challenge.

Moreover, the RoC also has to use a strong hand in ensuring the fact that companies do follow the rules strictly when it comes to filing their annual submissions with the regulator. Because late or irregular filing allow the companies who intend to indulge in frauds the much desired time frame to cover up their crimes and then get away with the regulatory requirements by paying a miniscule late fee and filing their documents. For a country that ranks 20 in terms of Corporate Governance (in a list of 38 countries, survey conducted by GMI ratings), and 75% of it’s top corporate executives agree in a survey that corporate fraud is on a rise (KPMG India Fraud Survey, 2010), these lapses are some serious trouble and must be taken care of on a serious note.

It’s time when the RoC rises from being a mere book keeper to an aggressive regulator in terms of attitude. Looking at the burgeoning size of India Inc. the sooner RoC understands this, the better it is for India.

FINALLY SOMEONE IS HERE TO GET PSBS OUT OF THEIR LAZY HABITS

What caught my attention recently was a statement highlighted by a business daily. It was a statement made by Financial Services Secretary D. K. Mittal, where he urged public sector banks to get out of their lazy habits.

That reminded me of another piece I had come across just a few days before. While comparing Mittal with the erstwhile chief election commissioner T. N. Seshan, the article mentioned how Mittal is trying to stir up the system like Sheshan did, in the limited world of public sector banks (PSBs).

The thought of Mittal wanting to put in order the house of PSU banks, reminded me of a certain talk that did the rounds last year. It was about the forced mergers of unviable PSBs with their healthier cousins. Now, on one hand, Mittal wants the banks to be more efficient and on the other hand, the government is mulling to dump inefficiency on the heads of a handful of PSBs who are ‘somewhat’ efficient. And that means, Mittal’s job is not going to an easy one.

To achieve a state of total financial inclusion, a task which has been on the government’s top agenda for quite sometime now, in a country where 50% of the population still lives without a bank account, the banking sector needs to be super-proactive and efficient. But a look at the PSBs (except for a few rare exceptions) – including those which have been in operation for over 50 years now – reveals how slow they have been. For example, Bank of India was founded way back in 1906 and even after 106 years it only has 3,752 branches; Central Bank of India was started in 1911 and currently it only has 3,967 branches, while an ICICI Bank that came into existence just a couple of decades ago now has 2,760 branches across the country. For that matter, IDBI Bank, which was given a license only during the last decade, showcases a network with 973 branches. So the question remains, how did the private and semi-private banks manage to expand their network at a pace at which the PSBs could not in a century?

Well, the answer lies in the spirit of competition, a desire to grow and constant pressure from shareholders to earn profits. As long as the PSBs do not grow fast enough and manage efficiency to take up the challenge to prove a point, there is no way their government-sponsored mines can dig out diamonds, at least not close to what Mittal imagines. But for this, even Mittal has a role-play at hand. The government being the largest shareholder, he has to make these banks accountable for their performance. But at the same time, he also has to give them the desired freedom of operation and strategy making. Forcing a bank to merge with some inefficient and loss-making entities can never help the PSB-system become more active and efficient in terms of operations. Merger here is the wrong strategic decision. It cannot be used as an excuse to disguise some entity’s poor performance.

What Mittal wants to do is noble. It sounds incredible. But as of today, only on paper and in the mind. No doubt, if he succeeds, he’ll single-handedly add great value for the country. It would be a deed well done. But for that he has to think like a strategist and focus on removing the structural bottlenecks first. Asking the PSB bloc to start delivering the goods as a whole isn’t a phenomenon we are familiar to. He isn’t too. Perhaps an assignment or two to copy from the book of the private banks could be a good start. Question is - will the PSBs - the lazy ones I mean - be willing to lift the pen?