IiAS Sustain, a wholly owned subsidiary of IiAS, has published a study on Workplace Safety in India

IiAS Sustain, a wholly owned subsidiary of IiAS, has published a study on Workplace Safety in India; this is the first study of workplace safety in India after companies have begun publishing safety data on Business Responsibility and Sustainability Reporting.

The report provides an overview of the current state of workplace regulations in India, and the current practices and disclosures. In addition, the report analyses the safety performance metrics across sectors and between public and non-public sector companies and identifies companies and sectors with superior safety practices.

Safety and welfare of workers on the factory floors are rarely matters of concern for the board and top management, whose pay structures continue to reflect a focus on the bottom line.

This study has been supported by APG, a Dutch pension provider and HDFC Ergo General Insurance, a non-life insurance company.

Through this study, IiAS, APG and HDFC Ergo General Insurance draw attention to this subject to try ensure worker safety is a priority for boards.

In FY23, NIFTY-500 companies employed a total workforce of 10,408,603, consisting of 3,989,262 workers and 6,419,341 employees.

• Workplace injuries increased to 10,733 in FY23 from 9,889 in FY22, with high-consequence injuries rising by a third to 907 (compared to 679 previously). • Total fatalities decreased to 463 in FY23 from 587 in FY22, however, it still accounts for more than one death per day.

As this data pertains to NIFTY-500 companies which are larger, well-resourced entities with informed boards of directors, it raises concern.

This data covers direct employees and excludes outsourced labour or temporary workers, suggesting that the actual numbers may be higher.

Companies should prioritize transparency by disclosing policies and adherence to global and domestic standards. Accountability must be established at the appropriate level. Stakeholders, including suppliers, contractors, and third parties, should also be considered.

The study also reveals a strong correlation between health and safety training and reduced workplace injuries and fatalities. Prioritizing such training is a cost-effective strategy. Employers should extend health insurance benefits not only to 100% of their workforce but also to contractual workers. Evidence suggests that increased health insurance coverage leads to reduced time lost due to injuries.

As companies continue reporting data, we anticipate gathering comprehensive information for better analysis of underlying trends. Ultimately, prioritizing workplace safety will position India as a prominent global manufacturing hub.

“At APG, employee health and safety has always been a key area of focus and discussion. As a responsible, long-term investor and in line with our clients’ responsible investing policies, we are constantly raising the bar when it comes to evaluating the safety culture at our portfolio companies. Our approach is based on the underlying tenet that access to safe and healthy working conditions is both essential from an operational perspective and is a basic and fundamental right.” said Aaten Thijs, CEO, APG Asset Management Asia.

"Workplace safety is a strategic investment in the well-being of workers and the prosperity of businesses and economies alike. It is not only a regulatory requirement but also a moral obligation to protect workers and promote sustainable growth in India. Safe working conditions attract and retain skilled workers, enhance the reputation of businesses, and foster trust among stakeholders. This, in turn, can lead to long-term success and competitiveness in the market.", said Amit Tandon, MD and CEO, IiAS

The Persistent NPA Mess

Guest blog + Book extract: Rajrishi Singhal

In this guest blog and book extract, Rajrishi Singhal, the author of ‘Slip, Stich & Stumble: The untold story of India’s financial sector reforms’, discusses the burgeoning NPA problems, and how these were tackled.

The London market strives to stay relevant

“The financial services sector is central to the UK economy, and at the heart of this government’s growth mission,” said Rachel Reeves, the UK’s new chancellor, on 11 July. She was commenting on the UK’s Financial Conduct Authority (FCA) approving the biggest changes to its listing rules in over three decades, which take effect from July 29. “These new rules represent a significant first step towards reinvigorating our capital markets, bringing the UK in line with international counterparts and ensuring we attract the most innovative companies to list here,” she added.

London’s shake-up of its regulations has long been in making. The UK markets have been battered by global competition, and London risks losing its stature as one of the world’s leading financial centres.

This move can be seen as similar to SEBI’s recent series of discussion papers directed towards ‘ease of doing business,’ but on some specifics like related party transactions and control, the contrast between the UK regulators and our regulators is telling as regulations have moved in opposite directions.

There is a lot to unpack in UK’s new listing rules, but what is curious is that the regulator has repeatedly warned that the new rules will mean there is a higher risk for investors and defended itself by arguing that “the changes we are setting out today will better reflect the risk appetite the wider economy needs to achieve growth and promote a more diversified listed market.”

Regulatory Action: Shock and Awe

We often see regulatory actions against various financial entities after the regulator has ‘inspected their books.’ Recent regulatory action includes restrictions on accepting deposits, opening new accounts through online banking channels, issuing co-branded cards, launching new mobile products, managing debt public issues, etc. These actions reflect the regulators commitment to maintaining financial stability, fair markets, and ensuring compliance with regulations. However, investors and at times consumers view such action with shock and awe, as these impacts them directly.

Twin boardroom troubles

In this guest blog N Sundaresha Subramanian, the author of The Dirty Dozen – India’s twelve largest corporate defaulters talks about the broken governance structure prescribed by an age-old law. The book extract talks about the opaque processes around board appointments that prevailed at the time.

Boards and AI

The journey towards effective oversight of AI, by a board, begins with education. Board members must cultivate a foundational understanding of AI concepts, capabilities, and limitations. This can be achieved through various means, including engaging external expertise, or leveraging internal resources within the management team. Equally important is staying informed about the legal and regulatory landscape surrounding AI.

However, familiarity alone is insufficient. Boards must translate their understanding of AI into actionable strategies within their organisations. This involves fostering collaboration among cross-functional teams comprising business, legal, and technology experts.

Building a robust AI infrastructure requires more than just technological prowess; it demands a foundation of high-quality data. The journey towards AI integration is iterative, and progress must be monitored closely. Quarterly reviews conducted by the board serve as checkpoints and provide opportunities to ensure that AI remains a value-adding proposition for the organisation.

Guest blog: IT Governance in Banks

Last month Reserve Bank of India took supervisory action against Kotak Mahindra Bank Limited for gaps in their technology function. In the past they have taken action citing IT concerns against Bank of Baroda, Paytm Payments Bank, HDFC Bank, (- by no means exhaustive), etc. In this guest blog, R Gurumurthy, former Head of Governance, RBL Bank Limited, lists some of the areas that RBI typically flags in its IT audit of banks and how to interpret its missives.

Independent Director Rotation: Losing institutional memory

The Companies Act 2013 introduced the tenure rule for independent directors a decade ago. Under this, independent directors will have a 10-year maximum term on the board of a company; this ten-year count was from 1 April 2014. Consequently, long tenured directors are now retiring, and will continue to do so over the next 18-months and new directors are being appointed in their place.

In a series of pieces, we look at how companies of the NIFTY 500 that are yet to manage the transition. Our analysis shows that almost 198 of the NIFTY 500 companies have seen a churn of their independent directors over the next 18 months. More importantly, in some companies, the rotation of independent directors will be disruptive, leading to a loss of institutional memory and possibly an increased reliance on the promoter group during board deliberations.

This is the third piece of our series on Independent Director rotations. In the first piece (November 2023), we reviewed the headline numbers for the NSE 500 companies and the impending board refresh. In the second piece published last week, we called out some practices that are compliant with the letter of the regulations, but we believe not their spirit. We believe such practices defeat the purpose of mandating rotation of independent directors. Both these papers are available on our website.

It’s a small world after all

The Companies Act 2013 introduced the tenure rule for independent directors a decade ago. Under this, independent directors will have a 10-year maximum term on the board of a company; this ten-year count was from 1 April 2014. Consequently, long tenured directors are now retiring, and will continue to do so over the next 18-months and new directors are being appointed in their place.

In a series of pieces, we look at how companies are managing this transaction.

In the first piece (November 2023), we reviewed the headline numbers for the NSE 500 companies and the impending board refresh.

In this blog we call out some practices that are compliant with the letter of the regulations, but we believe not their spirit. Such practices defeat the purpose of mandating rotation of independent directors.

Japan’s Equity Renaissance

Two countries, India and Japan, dominated the conversation at the recent 3000-people strong HSBC Annual Global Investor Summit in Hongkong. This blog focuses on Japan, where following decades of stagnation, Tokyo's benchmark Nikkei 225 broke past its 1989 peak on 22 February 2024. While stable macro-economic, favorable geopolitical conditions and leaner balance sheets have energized its equity markets, governance reforms have had an equally important role to play.

Linde India: Is it noxious for minority investors?

Linde group operates in India through Linde India Limited (75% ownership by Linde plc), Praxair India Private Limited (100%), Linde Engineering India Private Limited (100%), Linde Global Support Services Pvt Limited (100% owned Global Captive Centre, GCC) and Linde South Asia Services Limited (owned jointly by Linde India and Praxair India, to manage the operations and maintenance of the facilities set-up/owned by both entities). In addition, Lind plc is servicing clients in India directly.

As the India business grows, and newer opportunities like chip manufacture picks up in India, the additional and more complex gas requirements of the economy, will need to be met. Which group entity gets to service the sector – the parent company directly, the wholly owned subsidiary or one in which the economics are shared with public investors. a multiplicity of entities enables MNC’s to choose which entity will pursue the newer opportunities, which has a bearing on its profitability.

Global companies struggle to deal with listed subsidiaries in India, given that in most markets they operate through wholly owned subsidiaries. They need not. The same governance framework that applies to the parent and globally, should also apply to businesses in India. Loyalty to the parent is one thing, but it cannot be at the expense of the Duty of Care owed to public shareholders of a listed company.

Indian Corporate Governance: A five-year progress report

Each year for eight years now, we have been scoring the BSE100 companies on their governance. We published the ‘scores’ based on data for FY23 earlier this month. Using this data, it is time to look back at corporate India’s governance practices over 5-years.

First, is it possible to measure something as fuzzy as governance? The scorecard approach attempts to do just this, by first breaking down the various elements and then assigning it a score. For example, while looking at a firm’s dividend distribution policy, you first look at whether the company has a policy or not. If so, you look at elements of the policy, for instance, disclosure of a dividend payout ratio or a range. And finally, you look at evidence of adherence to policy or explanations for non-compliance.

As these elements span across parameters like transparency, board composition, risk management etc., assigning a number can be challenging as there is an element of subjectivity involved. Using well established frameworks, helps minimize such subjectivity, but does not eliminate it altogether.

We use the G20-OECD Corporate Governance Principles and scored the BSE100 companies focusing on four of the six pillars. These are -

• Rights and equitable treatment of shareholders
• Role of stakeholders
• Disclosures and transparency
• Responsibilities of the board

The remaining two pillars - Ensuring the basis of an effective corporate governance framework and Developments relating to institutional investors, stock markets, and other intermediaries, are not in the company’s control, so are not relevant to this analysis.

Elon Musk and CEO salaries in India

Last month, the Delaware Court of Chancery struck down Elon Musk’s gravity-defying $55.8 billion pay-package at Tesla, approved by shareholders in 2018. At $55.8 billion maximum value and $2.6 billion fair value, the compensation was almost entirely through stock grants. The plan was “250 times larger than the contemporaneous median peer compensation, 33 times larger than the plan’s closest comparison, which was Mr Musk’s previous compensation plan.” In 2022, it was estimated to be around six times larger than the combined pay of the 200 highest-paid executives in 2021.

Operating at scale

Request for Comment: Change in voting policy: Auditor re-appointment

In a bid to strengthen the financial reporting framework, Section 139 of the Companies Act 2013 has mandated rotation of individual auditors every five years and of the audit firm after a maximum period of ten years (after two terms of five years each) in listed companies1. A cooling-off period of five years after the stipulated threshold is required to be considered eligible for re-appointment. Section 139 is applicable with retrospective effect - which means the existing term of the current auditors will be taken into account for computing the overall tenure.

The Act has provided a transition window: instead of making immediate changes, companies with vintage auditors (tenure of >10 years) can comply with the rotation requirement anytime within three years from the date of commencement of the Act (1 April 2014).

IiAS’ analysis shows that 25 of the CNX Nifty 50 companies (17 of the BSE S&P Sensex companies) have auditors where the tenure of the audit firm/network has exceeded 10 years (refer Annexure A). However, only two of these companies have rotated their auditors in the current proxy season. The rest have sought refuge in the 3-year transition window.

Periodic rotation of auditors is an accepted governance practice. Under the Banking Regulations Act 1949, banks must change their auditors every four years. The Companies Act 2013 – including the provisions of Section 139 – has been in the works for a while. This gave companies sufficient room to plan a transition. Therefore, IiAS has been recommending that shareholders vote AGAINST the reappointment of vintage auditors, despite the window-period afforded by the Companies Act 2013. IiAS believes good corporate governance practices transcend regulatory requirements: companies should have proactively rotated their auditors rather than wait for regulations to compel them to do so.