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Culture of compliance: Litmus test for Indian corporates

29 April, 2016

The recent chase of promoters who are bank defaulters may turn out to be one of the worst chapters in Indian corporate history. The catastrophe is by no means only a Kingfisher affair; it has largely tarnished the image of India’s business fraternity as a whole, including mighty kings and small players. As a direct consequence, even fundamentally sound corporates may have to struggle to win the trust of global players, especially in the context of collaboration and co-creation opportunities in the era of where ‘Make in India’ in the buzzword.

But instead of measuring the effects of the tragedy, it would be prudent to mull over the root cause, which has more to do with non-compliance than bad governance.  

It is a well-known fact that much of the management time in several Indian companies is spent in avoidance of legally binding mandates and procedures: whether evading revenue payments like stamp duty, sales tax and excise or downplaying the need for consent in critical matters among shareholders, boards or internal committees alike. Worse, they violate the financing documents, shareholder’s agreements with strategic partners, investment agreements with PE players, technical collaborations or similar arrangements.

More often than not, corporate stakeholders choose unfair rewards at the cost of undue risk, prefer 

short-term gratification overlooking the long-term ramification and follow market diktats ignoring ethical considerations. They don’t think twice in skipping critical permissions despite the inevitable consequence of vexatious and lengthy litigation. This is rampant across companies. Why?

The reason is, except a few, we simply don’t have a strict culture of compliance. In a globalised era, this fundamental deficiency can render the best of business plans ineffective, even redundant at times. More than fines, penalties, audits and litigation, non-compliance can invite shareholder dissent, customer protests and employee exodus. It is not difficult to imagine the fatal outcomes of each of these eventualities, as devastating as the upshots of lop-sided debt financing or promoters’ penchant for lavish lifestyles invariably at the cost of business growth as is evident every day on page 3.

Pledging allegiance to compliance is a huge investment of time and commitment, more than money. It calls for robust institutionalised process of proactive due diligence, continuous vigilance of corporate affairs, honest ownership and stricter measurement of slippages and prompt and proactive corrective action. More importantly, it demands unflinching ethics in questioning suspect transactions and motives at the right time, no matter where they emanate from in the hierarchy.  

Many organisations view compliance as an external mandate at best. This is a sceptical view as much of compliance. It also requires a dedicated team having in-depth technical knowledge and a strong information repository for company-wide access of and awareness on the different types of compliances and the complexities of each.     

Organisations with longer-term goals, view compliance as a strategic initiative that helps build competitive edge in the global market place. No wonder, they spell out the strategic vision and mission for compliance in clearly articulated terms and link it to risk management. They see to it that compliance is not reduced to a superficial exercise gasping for breath in the maze of policy and procedures. Instead, they ensure that compliance stems from ethics which is a necessary gene marker of the corporate DNA.  

If the Indian industry wants to become truly global, they would do well to learn from the ‘less government to more governance’ mission of our PMO. In their case, however, the big leap should be ‘from compliance of convenience to culture of compliance’.

(Nitin Potdar is M&A partner with J. Sagar Associates. Views are personal).


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Culture of compliance: Litmus test for Indian corporates

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