In a major overhaul of corporate governance norms, market regulator Securities and Exchange Board of India issued several new rules relating to the way listed companies operate in India. Among key measures the regulator issued like providing for enhanced disclosures for compensation of independent directors, restricting the number of company boards an independent director could serve on to seven, and putting in place a comprehensive whistle blower policy.
The current measures taken by SEBI are insufficient and do not appreciate the problem faced by retail investor while investing in equities. Corporate governance issues in corporate India have been over-weighing in minds of retail investor while investing in the domestic equities. This concentrated controlling shareholders coalition creates agency issues such as – reluctance to distribute cash flows, excessive investing in growth projects to have a larger empire, complex structures / tunneling, and voluminous yet opaque information – while other minority shareholders or independent board members are disinclined or unable to challenge them.
A radical and most impactful solution to this issue is to provide an incentive to equity shareholders in the form of a compulsory dividend pay out policy, around 25% or more by corporate coupled with an allowance for Corporate Equity (ACE), a form of allowing nominal interest on equity capital that is tax deductible. There is a possibility of an overstatement and understatement of the profit by the corporate which has suited their business and capital structure need. Minority Investor has to steer through the layers of financial statement which usually results in voluminous annual report, meager pay outs and in few cases nothings. The compulsory payout of the profits will ensure that accounting profits are aligned with the cash generated by the company leading the corporate towards fair accounting practices and eliminating debt bias, thereby, progressing towards much safer banking system in the country.