Governance’s weak in 50% of IPOs: Crisil

Corporate governance standards were ‘weak’ in almost 50% of the 29 initial public offerings (IPOs) graded by Crisil since May 2007, the rating agency said in a release on Thursday. Crisil said only 10% of the companies graded after the period had robust corporate governance structures, while 25% of them were average and 15% were above-average.

This revelation has come at a time when corporate governance has grabbed a center stage in India, following the accounting fraud in Satyam Computer Services.

According to Crisil senior director S Venkataraman, corporate governance has always been an important parameter while grading IPOs, and made a difference on the gradings.

“The IPO gradings of companies where corporate governance standards were weak, typically tend to get a rating at the lower end of the gradings band,” he said.

Crisil said it differentiated between well-governed and weakly-governed IPO graded companies on the basis of board quality, their independence and ‘propensity for related party transactions’, referring to dealings with group companies.

“While not the sole determining factor, the quality of corporate governance as assessed by Crisil may significantly influence the Crisil IPO grade, beyond what the company’s business prospects and financials may suggest,” Chetan Majithia, head equities, Crisil Research, said in a report.

The ratings agency noted in over 45% of the evaluated companies with relatively weak governance scores, independent directors exhibited less-than-expected awareness or other businesses of the promoter group, or even IPO-related plans and strategies of the company.

“Moreover, in 15% of the cases, the quality of independence of the board from promoters or management was itself an area of concern, as it could impact the extent of balance and quality of oversight that independent directors are expected to bring to bear on board decisions,” Crisil said.

“In about 55% of the companies assessed to have governance issues, related party transactions or presence of group companies in similar lines of business emerged as key issues, as these could potentially affect minority shareholder interests,” it said.

WORRY LINES
Only 10% of the firms graded after May 2007 have robust corporate governance structures

Governance is an important parameter for grading IPOs and makes a difference on the gradings

Source: The Economic Times, 20/02/09