One of the world's foremost authorities on corporate governance, Mervyn E King, has thrown his weight behind India Inc in its opposition to the government's move to prevent companies from floating multi-layer subsidiaries.
The government is planning to incorporate a clause in the Companies (Amendments) Bill, 2003, which will prevent companies from forming multi-layer subsidiaries. If the amendments come into force company A can have a subsidiary, company B.
However, company B cannot have another subsidiary. At present, most corporate houses in India operate through a multi-tiered subsidiary structure.
"There might be a sound business reason for the formation of another subsidiary. Why restrict that? If the system is being abused, there are other places to deal with this," King said, in an interview with Business Standard.
The corporate governance guru's comments are significant because he submitted two reports that have provided the framework for corporate governance in post-apartheid South Africa.
He is also a previous president of the Commonwealth Association on Corporate Governance.
King is on a visit to India to deliver the keynote address at the fourth international conference on governance jointly organised by the Asian Centre for Corporate Governance and the Indian Merchants Chamber.
The arguments used by King are precisely those used by corporate India in opposing this amendment.
The Bombay Chamber of Commerce and Industry contends that this will act as an unreasonable restraint on foreign companies investing in India, on the formation of joint ventures and participating in the divestment of public sector undertakings.
Most bidders for PSUs pick up stakes through special purpose vehicles which are many times multi-layered subsidiaries.
The government is considering the suggestions of the chambers of commerce on the issue.
Although Adrian Cadbury is regarded as the father of corporate governance, King's place is unique. Cadbury instituted a mechanism that chiefly concerned itself with financial propriety and safeguarding the interests of shareholders.
King widened the ambit further by bringing in customers, vendors and even employees.
Further, the first King report of the 1990s also dwelt at length on bringing South Africa's underprivileged into companies and right into the boardroom.
