The accounts of Enron’s subsidiaries were not attached with the main company’s balance sheet. Like many other US public companies, Enron sought and got an official exemption of such a requirement under the rules framed by the Securities and Exchange Commission) of the United States.

Enron’s independent auditors, Arthur Anderson, knew about the fudged accounts of both the principal company and its subsidiaries, but failed, deliberately or carelessly, to report the vital financial information for the knowledge of the firm’s creditors and shareholders. The investigations into the fall of Enron exposed how these subsidiaries were used by the management to subvert the prudent accounting norms and divert funds from the parent company for personal benefit of a few top executives.

The Securities and Exchange Board of India (SEBI) broke away from the old regulation which required public companies to attach annual audited accounts of their subsidiaries with their respective main balance sheets. The SEBI now allows public companies not only such an exemption of compulsory display of subsidiaries’ accounts with the main balance sheet, but also distribution of abridged balance sheet and annual accounts by even the holding company to shareholders which hardly reflects true financial health of such firms. Few can blame mischievous management of companies to take full advantage of these relaxed disclosure norms. Much is being made of the accounts books of the subsidiaries of Mumbai-based D B Realty, one of the suspects in the kick-back case with regard to 2G spectrum allocation fraud, which allegedly connects ‘investment’ of some Rs. 206 crore in Chennai’s Kalaignar TV having links with disgraced former telecom minister Andimuthu Raja’s DMK party and huge off-the-book funds arranged to secure the spectrum. The TV channel is controlled by Tamil Nadu Chief Minister M Karunanidhi’s second wife and their daughter Kanimozhi, a DMK MP, through a combined shareholding of 80 per cent between the two.

The fault for lack of financial transparency in the D B Realty money trail squarely rests with the regulators, SEBI, and lacunae in the Companies Act which allow such transactions outside the public view. Strict regulation of company subsidiaries to ensure transparency in their financial and business transactions is important for good corporate governance. D B Realty exploited the regulatory shortfall to keep the questionable transactions from their easy public detection. SEBI follows only the bad examples of the US SEC while the Indian stock market watchdog conveniently goes easy on framing strong rules on financial disclosures on the lines of SEC and implementing them. The existing Companies Act of 1956 and its misinterpretation and misrepresentation are primarily responsible for the laxity in corporate financial transparency and corporate governance.

It may sound odd the government is clearly indulgent towards our public companies on the issue of financial transparency, or the lack of it. This is despite the so-called public pledge by Prime Minister Manmohan Singh, United Progressive Alliance (UPA) chairperson Sonia Gandhi and Congress general secretary Rahul Gandhi of making a serious attempt to weed out corruption in public life. Otherwise, how could anyone explain the reported move by the industry-friendly Corporate Affairs Minister Murli Deora to reject an important recommendation of the Parliamentary Standing Committee putting a restriction on the number of step-down subsidiaries a company has. Deora would rather go by the recommendations from industry barons, with whom he discussed the issue just ahead of the current budget session, than by those from the statutory parliamentary panel.

If Deora has his way, the corporate books of accounts will continue to be less transparent and ‘governance deficit’ will be guaranteed. It will be a clear U-turn on the part of the corporate affairs ministry from the position it took under the erstwhile minister, Salman Khurshid, at the time of its deposition before the standing committee. Khurshid was shunted out of the department of corporate affairs to the low-profile ministry of irrigation and minority affairs with a cabinet rank during the recent cabinet reshuffle by the prime minister. And, Deora was installed in his place.

The crucial change of guards at the corporate affairs ministry just ahead of the presentation of the revised Companies Bill before Parliament raised eyebrows of many. Even the IAS secretary in the department was allowed to go on retirement less than a month before the beginning of the budget. The erstwhile corporate affairs minister and the departmental secretary worked hard and sincerely for a long time to provide the final shape to the Companies Bill. What surprised the most is the Prime Minister’s choice of Deora for this long debated task, knowing fully well about his alleged industry affiliations. A constant pressure from industry regarding various provisions of the proposed new act has delayed the preparation of the Company’s Bill for nearly five years. It was due to be placed in Parliament in the last winter session.

The Parliamentary Standing Committee in its report is believed to have argued that “as far as diversion of funds is concerned, we found that opening up of ‘N’ number of subsidiaries is a very major source of diversion of funds. As of today under the companies act, there is no limit as to the number of subsidiaries a holding company can really open. It goes down even to the seventh line, eighth line and ninth line of subsidiaries. So, a major suggestion which has come up during the course of discussions before the committee, which the ministry has agreed to, that we will stop it only at the first line of subsidiary.” Industry was unhappy about the ministry’s acceptance of the committee recommendation. Now, Deora wants to reverse it to make industry happy.

Deora, as a petroleum minister in the petroleum ministry earlier, had done his job. He decontrolled the prices of petroleum products. It was a great boon to the petroleum companies as well as the government. The higher pricing of hydrocarbon gas from the Krishna-Godavari basin, against the demand of large downstream users such as power and fertilizers, was extremely beneficial to the lone lease holder-producer, Reliance Industries. As the minister of corporate affairs, he is seen as a great protector of big industries again. The new minister’s reported stand on the existing corporate freedom to set up any number of subsidiaries compromises with the need for regulations to ensure good corporate governance. But, does anyone truly care for governance?

Could Deora too have been an industry plant in the Manmohan Singh cabinet as Andimuthu Raja was alleged to be? It is most unlikely. Deora is a honourable Congressman. The prime minister was not bound by any ‘coalition dharma’ for Deora’s inclusion in his council of ministers and subsequent allocation of portfolios to his party colleague from Mumbai. Yet, it will be hard to silence critics of Deora for his strong pro-industry views at a time when high level corporate corruption is in big focus and the UPA government’s public admission of ‘governance deficit’ and ‘ethical deficit.’ By ignoring the parliamentary standing committee’s recommendation on disclosure norms and cap on subsidiaries, the government will only ensure that these ‘deficits’ continue. (IPA Service)