The market has given its approval to India Against Corruption (IAC) revelation on DLF's dealing with Sonia Gandhi's son-in-law Robert Vadra. The stock tanked 7.2 per cent on Monday and is trading marginally lower on Tuesday morning, the first day of trading after Arvind Kejriwal, raised questions over the dealing between the two in a press conference.
The issue of the responsibility of independent directors raises a question on the various individuals and agencies involved that were either silent spectators or preferred to look the other way.
Being a listed company, DLF and its board are answerable to shareholders. For a company that borrows at an effective weighted average rate of 12.38 per cent, giving away Rs 65 crore as interest free loans, without informing its board of director's raises questions on corporate governance. Interestingly, this interest free loan was utilised to fund purchase of its own property at a substantially discounted price. Kejriwal has a point when he questions this rationale of exchange of money.
Independent directors of DLF, as reported by The Economic Times, have said that the controversial decision between Robert Vadra and the company was "not flagged off at any board meeting". But since when is a controversy involving the company a part of its board agenda? Firstpost.com points out that independent directors have once again let the shareholders down by not raising the issue. Even if the point was never raised during board meetings, the dealings between the two have been covered by media and were in public domain. These independent directors, one of whom is the former chairman of Ernst & Young India KN Memani, have towed the company's line without asking the awkward question.
The board of directors can be given the benefit of doubt that they do not read newspapers, but the same luxury cannot be extended to its auditors. In every corporate scam, the role of the auditor has been questioned as they are privy to information that no other stakeholder of a company is. While the DLF case cannot be termed as a scam, the fact that the auditor, Walker, Chandiok & Co, did not consider it fit to bring the issue in front of the board of directors defeats the purpose of having an external auditor who is impartial. Auditors are dependent on the companies for their fees and generally market their services to bag these accounts. This is why we rarely see any auditor raising uncomfortable questions.
Similarly the corporate governance report which the board presents to its shareholders as per its obligation under Clause 49 of the listing agreement has never served its purpose. None of the listed companies have ever raised questions of corporate governance within the company. Yet the lack of it is clearly visible not only in DLF's case but also in other listed entities.
Even though DLF stock was hammered on the bourses none of the analysts has bothered to downgrade the stock. Corporate governance, or rather the lack of it, no longer carries any weight for these analysts. Canada-based Veritas, an independent equity research firm, was the first and perhaps the last firm that was bold enough to raise management quality issues in its report in early March 2012. Titled 'A Crumbling Edifice', the report raised doubts about the company's disclosed equity and asset base and concluded that "If your investment decision incorporates management integrity, then bypassing DLF will be an easy choice."
A number of investors, including mutual funds, insurance companies and high net-worth individuals depend on these analysts to some extent on their investment decisions. While these large investors have the option of exiting their investment or raising these issues at the annual general meeting, they choose to do neither. Further, none of the questions were raised during the AGM, which most of these institutions never attend or fail in their duty to protect their investors' money by raising these issues.
None of the entities and individuals who could have questioned the deal did so. Meanwhile Vadra, through financial wizardry by creating a web of companies, as reported by The Hindu; and the 'loan' provided by DLF accumulated large parcels of land in various Congress-ruled states.
According to Wikipedia, a banana republic is a country operated as a commercial enterprise for private profit. It looks like Vadra is right after all.