📰 Laffaire NSE: is corporate governance an illusion?
Convulsions of outrage after episodes such as the NSE affair are pointless; significant institutional reform is a must
•Over the past 10 days, the revelations about the functioning of the National Stock Exchange (NSE) during the tenure of Chitra Ramkrishna as Managing Director and Chief Executive Officer (CEO) have had people shaking their heads in disbelief. The savvy head of the one of the world’s largest bourses taking guidance on organisational matters from a Himalayan yogi?
The damage is huge
•In his order, Securities and Exchange Board of India (SEBI) board member Ananta Barua makes short work of Ms. Ramkrishna’s contention that there was no danger of any damage being caused to NSE as the yogi in question is a ‘spiritual force’. He remarks with grim sarcasm, “I note that there is no exception in the Regulations or the SEBI Act or SCRA [Securities Contracts (Regulations) Act], that confidential information of the stock exchange may be shared with a spiritual force.” It may be that, in this instance, the NSE did not suffer any financial costs through the leakage of confidential information. But the reputational damage caused to the NSE and to India’s capital markets is huge.
•Sharing confidential information was one serious lapse on the part of Ms. Ramkrishna. Mr. Barua’s order highlights others. Ms. Ramkrishna appointed an individual, Anand Subramanian, first as chief strategic adviser and, next, as group operating officer without following due process.
•Mr. Subramanian lacked the credentials for the job, the position was not advertised and Mr. Subramanian was interviewed solely by Ms. Ramkrishna. He was recruited on a salary that was more than 10 times what he last drew and his salary was frequently revised without any evaluation being recorded.
•Mr. Subramanian was hired as a consultant and progressively given operational powers until he became virtual second-in-command in the NSE hierarchy. Ms. Ramkrishna ensured he was not designated as a key management person as that would have meant bringing Mr. Subramanian within the ambit of regulation.
Managerial wrongdoing
•Clearly, there was managerial misconduct at NSE. That is no surprise; managerial misconduct is a global phenomenon. That is why we need checks on management such as an effective board of directors. The bigger problem is that the board of NSE has been found wanting.
•Mr. Barua documents the board’s lapses. After the board was informed about the irregularities in Mr. Subramanian’s appointment, it discussed the matter but chose to keep the discussions out of the minutes on grounds of confidentiality and the sensitivity of the matter. Second, despite being aware of Ms. Ramkrishna’s transgressions, it allowed her to resign and on generous terms instead of taking action against her. Third, the Public Interest Directors (PIDs) failed to keep SEBI informed about the goings-on at the NSE.
•How did all this happen and how could it have gone on for so long? The answers lie in the culture of the corporate world and the board room.
•In the corporate world, much is forgiven on grounds of performance. When a performing CEO chooses to unduly favour a particular individual or individuals, boards see that as a forgivable infirmity. Considerations of equity or fairness do not trouble boards unduly — it is a mercy if breaches of regulation do.
The problem is structural
•The NSE ushered in a revolution at India’s stock exchanges. It rakes in enormous profits. In such a situation, boards would tend to think they can live with a degree of nepotism and other human failings in the CEO. ‘She’s doing a great job, she’s entitled to pick her team.’ Such an attitude may pass muster at your typical private sector company. Not so in a public institution which is a Market Infrastructure Institution (MII) because it amounts to a violation of regulations. The board of an MII must tell itself that there is little margin for error.
•As for dysfunctional or ineffective boards, these remain the norm despite numerous regulations, seminars and papers over the past four decades. The issue is not the credentials of board members or their domain expertise. Few boards can match the set of luminaries who sat on the board of the NSE. The SEBI order says that these very luminaries failed to measure up.
•The problem is structural. It has to do partly with the way board members are selected and partly with the absence of penalties where directors do not live up to their mandate. Board members are selected by top management (or, in India, by the promoter who is also top management). In leading companies and institutions, board memberships are lucrative, prestigious and carry attractive perks. Board members have every incentive to nod their heads to whatever the management wants done.
•To challenge management is to ensure that one’s term is not renewed. It also means antagonising one’s colleagues on the board, not just the top management. The dissenting board member becomes an outcaste on the board — he will find it difficult to make conversation over lunch. In the closed club from which board members are drawn, word spreads that the dissenter is a ‘trouble maker’. Other boards will be reluctant to touch him.
•As long as the top management selects all board members or can influence their selection, there is little hope of any active challenge to management. If we are to bring about meaningful change, we need to bring in diversity in the selection of board members.
•The top management must be allowed to choose not more than 50% of the independent directors. The rest must be chosen by various other stakeholders — financial institutions, banks, small shareholders, employees, etc. Then, we will have independent directors who are not beholden to the top management for their jobs. They will be accountable, not to the top management, but to stakeholders who have appointed them.
•Once that happens, the dynamics of the boardroom can be expected to change. Of course, we cannot be certain it will. At the NSE, there were five PIDs who were required to keep SEBI informed about any untoward happenings. They failed to do so. All we can say is that where independent directors are chosen by diverse stakeholders, there is at least the theoretical possibility of directors challenging the top management.
Issue of accountability
•A second thing that needs to happen is holding board members accountable for lapses. In the NSE case, SEBI has penalised Ravi Narain who happened to be vice chairman. Mr. Narain has made the point that there is no reason why he should be singled out as the board of NSE was collectively responsible.
•Regulators act against directors where there is financial malfeasance. They seldom act where there are breaches of regulation as in the present instance. This must change. Regulators must penalise errant directors through a whole range of instruments — strictures, financial penalties, removal from boards and a permanent ban from board membership.
•Lastly, regulators themselves must be held to account. In the NSE affair, questions have been asked of SEBI. For instance, why did SEBI not seek the help of the cyber police to ascertain the identity of the yogi? SEBI needs to explain itself.
•We need periodic independent audits of all regulators by a panel of eminent persons. The audits must evaluate the regulators’ performance in relation to their objectives. The internal processes and governance mechanisms of regulators must be subjected to the glare of public scrutiny. It is vital to guard the guardians.
•Convulsions of outrage after particular episodes will not take us very far. We need significant institutional reform if corporate governance is not to remain an illusion.
New Delhi needs to mainstream global law lexicon into its diplomatic toolkit to respond to Beijing’s direct challenges
•During the recent meeting of the Foreign Ministers of the Quadrilateral Security Dialogue or the Quad, India’s External Affairs Minister, S. Jaishankar said that the situation at the India-China Line of Actual Control (LAC) has arisen due to the “disregard” by China of “written agreements”. But what China has been doing at the LAC is not a mere “disregard”. It is a blatant violation of international law as part of a larger game of Chinese expansionism. Let us understand how.
Breach of law
•The India-China LAC engagement is guided by a series of bilateral agreements that the two sides have signed over the years. A central tenet of all these agreements is the complete proscription on the threat or use of force. For instance, a 1993 agreement between India and China provides that neither side shall use or threaten to use force against the other by any means. It further enunciates that the India-China boundary question shall be resolved through peaceful and friendly consultations. Likewise, Article I of the 1996 agreement on confidence-building measures between the two sides prohibits the use of military capability against the other side. The prohibition on the use of force is also enshrined in Article I and Article VIII of the 2005 and 2013 agreements, respectively. States being forbidden from using force in international relations is a cardinal rule of international law codified in Article 2(4) of the United Nations (UN) Charter. The UN Charter recognises two exceptions to this rule — self-defence under Article 51 and UN Security Council authorisation under Chapter VII of the Charter.
•The June 15, 2020 military scuffle between India and China in Galwan, that led to the deaths of 20 Indian soldiers, was a clear case of China using military force against India. This Chinese aggression not only violates all the bilateral treaties between India-China but also the UN Charter. Moreover, the Galwan military showdown was not an isolated incident. Since then, a muscular and assertive China and its belligerence toward India has continued unabated through multiple transgressions at the LAC. China has backed these transgressions by other developments such as implementing a new border law that renames several places in Arunachal Pradesh and aims to set up boundary markers on all its land borders. The LAC transgressions and the new border law violate Article IX of the 2005 agreement that mandates both sides to “strictly respect and observe” the LAC, pending a final solution to the boundary question.
•Furthermore, there are disconcerting reports of a huge military build-up by China with heavy weaponry including missiles in the Eastern Ladakh Sector. This amassing of armed forces along the LAC unabashedly breaches another key tenet of both the 1993 and the 1996 agreements. This relates to both countries reducing or limiting military forces along the LAC. Article III of the 1996 agreement specifically requires the two sides to reduce armaments such as combat tanks and vehicles, missiles, and mortars and big mortar guns. China has not complied with these legal requirements, instigating India to beef up its military deployment.
Weaponising global law
•China’s bellicosity towards India, exhibiting complete violation of international law, fits in the larger pattern of China’s conception of rule of law. Known as the ‘socialist rule of law with Chinese characteristics’, China views law as an instrument in the service of the state or, more precisely, the Chinese Communist Party (CCP). This is diametrically opposed to the rule of law theory in liberal democracies where law’s function is to constrain unbridled state power. Internationally, there are several examples of China weaponising international law to further the will of the CCP.
•First, China fervently denounced a 2016 ruling in favour of the Philippines by an arbitration tribunal under the aegis of the UN Convention on the Law of the Sea (UNCLOS), in a maritime dispute between the two sides in the South China Sea.
•Second, although China claims to be a defender of the international trade law regime at the World Trade Organization, the fact is that it has ingeniously exploited the system to pursue its policy of mercantilism by hiding behind a non-transparent and complex economic system. It is accused of providing illegal subsidies, manipulating currency to make exports competitive, stealing intellectual property, and forcing companies to transfer technology.
•Third, as American scholar Orde F. Kittrie writes in his book, Lawfare: Law as a Weapon of War, China “has a long history of gaming the international legal system by entering into legally binding nuclear nonproliferation obligations with which its rivals (including the United States, Japan, and South Korea) tend to comply while [China] secretly violates these obligations by providing nuclear technology to its allies, often through proxies”.
•In the case of India, China uses the sovereignty argument to cover up its barefaced illegalities. The Chinese unethical legal warfare or lawfare is aimed at hamstringing the opponents without actually fighting a war.
•This practice of weaponising international law sours relations between countries, generating an atmosphere of distrust.
India’s lawfare
•New Delhi should develop its strategy of ethical lawfare by mainstreaming international law lexicon into its diplomatic toolkit to respond to Beijing’s challenge. Rather than pussyfooting around, India should make a strong legal case by painstakingly marshalling all the international treaties, including the UN Charter and customary international law, at every forum to call out China’s illegal actions. An unequivocal proclamation should be made at all international platforms that India reserves the right to act in self-defence under Article 51 of the UN Charter to counter any Chinese misadventure. Enacting a national security law aimed at imposing restrictions or sanctions of various kinds (trade, economic, military) on those countries with whom India shares a land border can be an option. The purpose of India’s lawfare should be to ably demonstrate to the world that China’s international law violations pose a threat to the entire international community — not just India.
•There is no gainsaying that for India, a liberal global order dominated by American exceptionalism, notwithstanding its flaws, is a lesser evil than a world order subjugated by Chinese exceptionalism that strikes at the heart of cherished liberal democratic values.
📰 Questions on MGNREGA budget estimation
How the Centre’s approach has eroded the very premise of MGNREGA
•The disappointing allocation for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in the FY 2022-23 budget has created a buzz. Organisations such as the All India Kisan Sabha and NREGA Sangharsh Morcha (NSM) have raised concerns about the inadequacy of the amount. Grassroots activists and academics have been demanding higher budgetary allocations for MGNREGA; yet, the actual allocations have been considerably lower and severely inadequate to meet needs. The initial allocations in the past two FYs have been just about half of what was recommended by groups like the People’s Action for Employment Guarantee (PAEG) and NSM.
•Consequently, the consistent shortage of funds has caused a situation endemic to MGNREGA — that of deficits for State governments, long delays in wage payments, decline in the work provided in the last two quarters of the FYs, and significant pending dues at the end of the FYs. In FY 2021-22, a tracker released by PAEG showed that the initial amount allocated was nearly exhausted by September, and many States were running a negative balance. For FY 2022-23, PAEG had recommended a minimal allocation of ₹2.64 lakh crore, and NSM had recommended ₹3.64 lakh crore, but the government has allocated only ₹73,000 crore. In its recent statement, NSM has argued that this amount provides for only 16 days of employment to all the active job card-holding households.
•Why is the government’s allocation so much lower than what State governments ask for and civil society actors recommend? This question merits scrutiny of the way the government estimates persondays. A closer look at the Centre’s MGNREGA budget estimation in FY 2021-22 sheds some light on this.
Projected persondays
•Among other things, the budget calculations depend on two important variables: the projected persondays for the coming year, and the wage rate. Projected persondays are the total days of work anticipated for the year. The District Programme Coordinator is responsible for calculating this and submitting it to the State, which in turn collates the entire State’s projected demand and submits it to the Centre for approval. The MGNREGA MIS Report R2.2.2 has the monthly projections approved by the Centre, along with the actual persondays generated. A closer look at these figures for the last two years reveals some discrepancies. In FYs 2019-20 and 2020-21, the persondays generated was about 18.4% higher in Q4 when compared to Q3. However, the projected persondays for Q4 in FY 2021-22 appeared to be strangely and significantly lower than that in Q3. FY 2020-21 was an unusual year, with the pandemic and the subsequent lockdown measures leading to significantly increased MGNREGA work demand. Work demand continued to be high in FY 2021-22 as well, implying that the rural population was still relying on MGNREGA for their livelihood. For the first three quarters, persondays generated this year were only 7% lower than the persondays generated in the same time period last year. And yet, as on February 3, 2022, the projection for the last quarter of this year was only about 40% of that for the same period in the previous year. There seems to be no clarity on how this projection was arrived at, given previous trends, and given that with the harvest concluding MGNREGA work has traditionally picked up in Q4. However, what it does suggest is that the government had not revised its projections for the final quarter of this FY even while it announced supplementary grants worth ₹25,000 crore for MGNREGA in December 2021.
•There have been attempts by the government to curb work demand based on the availability of funds. In 2016, for instance, Business Standard reported that the Rural Development Ministry was unofficially communicating to States to cut down on MGNREGA work because funds were running out. Since budget allocations are based on projected persondays, underestimated projections will lead to inadequate allocation. The unusually low projections of the final quarter in the current FY certainly contributed to the supplementary allocation of only ₹25,000 crore, when activists had been demanding an additional allocation of at least ₹50,000 crore. The low allocation for FY 2022-23 is also likely to be an outcome of artificially low persondays projections.
Wage rate
•The official MGNREGA wages also contribute to keeping the budget low. Despite a clear mandate of the MGNREGA Act that the wage remuneration cannot be lower than the minimum wage in each State, the former remains much below the latter. In doing so, the Central government has violated the provisions of the Act, as well as the fundamental rights of MGNREGA workers. There have been estimates devised of what the average MGNREGA wage should be. For instance, an expert committee under the chairmanship of Anoop Satpathy estimated a need-based national minimum wage of ₹375 per day as of July 2018. In comparison, PAEG used a conservative estimate of ₹269 per day in its recently released pre-budget brief. However, according to the NREGA ‘At a Glance’ report, the average MGNREGA wages paid this year remain at a meagre ₹209 per day, and the low allocation for next year indicates that the wage will not be increased by much, if at all.
•However, even if we take the wage rate of ₹209 per day that the government is paying on average, the current FY is expected to end with dues of over ₹20,000 crore. The Central government’s expenditure for this FY is expected to be over ₹1.02 lakh crore even if the wage bill, material costs, and administrative costs are to increase in a linear fashion till the end of the FY. The pending dues for previous FYs add up to over ₹17,000 crore. Adding the two figures, the government’s estimated expenditure will be ₹1.19 lakh crore by the end of this FY. And yet, the government has allocated only ₹98,000 crore (₹73,000 crore in the initial budget plus ₹25,000 crore as supplementary grants) for the FY. In such a likely scenario, only ₹53,000 crore will be available for expenses in FY 2022-23. In fact, since FY 2016-17, 20% of the initial budget allocation has gone into clearing pending dues.
•Correcting for the mentioned discrepancies, PAEG recommended a minimal budget of ₹2.64 lakh crore for FY 2022-23, considering only the households that were active this year. However, even this number is much lower than the number of households that are registered under the scheme. MGNREGA treats employment guarantee as a legal right; any rural household can demand work up to 100 days every year, and the government has to provide it. As and when demand arises, the government must fulfil it. In this context, treating the budget allocation as a ‘ceiling’ to the work that can be provided erodes the core premise of the scheme. To illustrate, less than 5% of households active this year have completed 100 days of work. While an initial budget allocation has to be made, MGNREGA funds must be regularly replenished by supplementary grants provided based on actual work demand in each State. The Centre’s approach to estimating projections, keeping the wages illegally low, and treating the budget as an upper limit to the work that can be provided has eroded the very premise of MGNREGA.
