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[Music] hi there and welcome to et now I'm Ashwin Mohan and you're watching amicus curiae when we get to the sharpest views from the world of corporate law tax regulatory affairs and mergers and acquisitions now as we approach the end of 2018 corporate governance controversies at India Inc have assumed center stage yet again previously we have seen these controversies breaking out at the house of Tatas and Infosys and all the course of the last few weeks yes Bank Island office and san Pharma have come under the scanner of the investor community so on amicus Cuba this week we are getting you three big and exclusive voices and the madryn former chairperson at Sebby Anand Mahindra the chairman of the Mahindra Group and who there Kotick the executive vice chairman and MD at Kotak Mahindra Bank all these three gentlemen were together at the corporate governance summit the 2018 edition of the corporate government summit organized by excellence enablers Private Limited so for the next half an hour sit back and let the thoughts and views of these three Biggie's sink in the peg on which we want to hang this entire conversation is what I have stated other two many regulations are we getting too prescriptive are we telling everybody every morning do this do that do the other don't do this don't do that and in some sense not allowing people to figure out what is right and wrong and to go on those poses is it his life getting increasingly prescriptive in the corporate space there was a little concerned when you described us as people for whom there was very little disconnect between thought and word and I was trying to imagine that could also describe the current President of the United States so I'm not sure this is a compliment at all but I usually try to make sure there's a rhythm a relatively good disconnect at least in time between thought and words so that I have time to think about it and I'm giving myself that time obviously to answer your question but this is a very it's a very interesting question to ask as to whether things are getting too prescriptive you know there used to be that all saying during the license Raja that for every action there's an equal and opposite government program sort of a new Newtonian law if you will and sometimes you wake up and get that sense that are people forgetting that what you're trying to regulate is business and one of the most articulate practitioners of business man called George Daurio who virtually invented were American venture capitalism he used to say that look your job is not to eliminate risk it's to eliminate unwarranted risk and your job as a manager in fact is to assume risk and the more risk you take the more reward you get so risk is a very very integral element of the entire capitalist system sometimes I wake up and it's not the prescriptive Ness it's the sheer proliferation of regulations that almost seem to be designed to eliminate risk and so I would only start this conversation by saying that the fine line we have to walk is to ensure that with everything we are doing and I don't mind it being prescriptive regulations are meant to be prescriptive just a question of the plethora of regulations and how do we decide when we are getting to the point where we are creating bureaucrats and process followers and eliminating risk and therefore eliminating the very vital ingredient of what constitutes business enterprise forget India I think we saw a drama play out recently in the US with Elon Musk and it was prescriptive it was something that reined him in I think most people would would would agree that he needed to be reined in I mean smoking pot on a radio show and and and sort of talking policy after that does sound excessive but musk represents that vibrancy of capitalism the vibrancy of vision of taking risk his entire persona is based on taking risk so I think what I'd love to understand and and and have as a conversation with everybody here how do you measure when the risk has been eliminated and therefore capitalism in a sense has been quelled as opposed to simply being regulated and curbed that to me I don't think we have an answer to yet the European in the forefront of the effort to improve regulations filling regulatory gaps address regulatory overlaps did you have a sense of discomfort being a corporate leader being a very successful person in the commercial space a sense of discomfort that this entire committee system comprising a lot of people from different interest groups was trying to create a kind of a narrow path in which you cannot tell people that take decisions that take risks as an unsent from those that were following procedure seeking safety in doing what several people have done before not venturing to go where no man has gone before because that is I think what leads to progress did you get a sense of discomfort when you let the company I wanted to first start by something which I was told as a child by my grandfather and he said that in life there are two kinds of rules God made rules and man made rules never break the God made rules be ready to question man-made rules and this is the philosophy which I think is at the heart of the issue between form and substance and what we are dealing with is a society which with an intent to control or manage substance has moved significantly in the direction of rules versus principles and I think the reason for that is actually in the financial sector in particular it goes back to the global financial crisis which happened in 2007/8 and if you look at the whole area of evolution of regulation and supervision pre-2008 it was on principles and what we saw happen in the financial markets is a race to the bottom and inevitably a bank a versus Bank B Bank a which followed principles Bank B which said let me push the envelope on principles Bank a lost out and you saw a inevitable race to the bottom leading to the global financial crisis so there has been a shift in the whole journey on regulation more towards rule based philosophy versus just the principle based philosophy and this is a fundamental shift we are seeing in the last decade or so in particular if you go back to the UK you had a FSA which was separated from the Bank of England and the whole narrative pre-2008 is was very different from what we are seeing today and that brings us to the heart of the issue on letter versus spirit what we are finding today in the world of regulation is that when one takes a view that let's follow the spirit and the letter is not clear therefore you go with the spirit you inevitably get a pushback hey don't give me the spirit business this this is the rule have you followed it or not and you get a slap back there for if you take a view based on spirit you run into problem therefore even if spirit is a question mark on a particular rule you then say listen I have no ability to question spirit let me at least follow the rule so we are living in this a world which is going through this transition in a way from principles to rules and there may be a spirit behind the letter but people forget the spirit and the letter remains and we have to deal with this having said that I think in the world of corporate governance the challenge which we face is measurement of the rules and I believe use a tennis analogy here and I think I speak about it in the context of my own career in the early days of my career I was very comfortable hitting the ball on the line okay which means it's still inside and valid but hit the ball on the line and be open to hitting it on the line I have now come to a view make sure that you hit the ball inside the line because if it hits the line then you have an umpire who decides whether it's outside or inside and God forbid if the umpires says it's outside you are in deep trouble therefore a fundamental philosophic I have moved towards this make sure that come what may work towards following the rules but hit the ball clearly inside the line and don't take the risk of even trying to hit on the line can I ask him that you put you put the brilliant matter further and it's related to what I was saying do you think that by hitting inside the line you have in a sense taken less risk than you would have and maybe for gone certain opportunities to grow I wanted to supplement that saying the increasing margin of safety as you get away from the line and more insight is that leading to suboptimal results the risks of the umpires saying you hit outside the line a much greater including the reputational risks they hitting inside the line therefore the route when you're looking at risk on them there is that reputational risk and in a 24 by 7 media your first hung in the court of media well before you go out into the real world in the regulated environment of business it's much worse because it's not just the one point that you lose I think there is reputation risk attached there's all manner of things attached are you sensing that post 2008 and clearly that's a landmark not just for the financial sector but for the global economy post 2008 our regulators worldwide in order to prove that they belong that they are relevant that what they do is legitimate are pushing the envelope you're asking a regulated entity or an unregulated entity both okay I think I think the regulators are also grappling with this because for every good story there are half a dozen stories which are a problem and I can sort of relate to the current financial sector situation in India and you sit back and ask the question where where does the system draw the line and and again I am more in the context of the financial sector if you look at six layers of checks including the financial sector the first layer of course is the management the second layer is the board the third layer is shareholders particularly the institutional shareholders fourth layer is the auditors fifth clear for leveraged financial institutions is the rating agencies and the sixth layer is the regulator and the supervisor now we have we have seen a number of situations where in the world of markets where there are minority shareholders who have very little say otherwise or even debt or holders these six layers of checks and balances are meet to be working and we are finding situations where you question whether some or all of these layers are not doing their fiduciary job and how do you work towards a situation where finally the blame comes on policymakers when all the five or six layers fail so how do you deal with that and the reaction of the public where money is at risk and it is a backlash and then a societal backlash there is a strain a very social media has changed the parameters of B - B - B - C in the whole communication and me to see with relatively limited understanding of the reality you can see things getting out of control and regulators therefore I have had to meet this challenge of being responsible disproportionately as well [Music] Sadam the reason I wanted you in the conversation rather than sitting out there is because you could come in very very strongly on issues like this you've been a regulator yes I wanted to flip the question and ask you because you've seen in the past as well they said the failure of many of these layers whether it was the rating agencies in 2008 recently also the rating agencies in the case of Ireland FS so when having been a regulator what is your answer to your question do you think that they're overreaching right now I think let me step back a bit and address two other issues before I get to what you are raising one is how a regulator is appointed you find someone that is available who seems to be doing nothing much that somebody else cannot do and therefore put him over as a regulator the regulator is not accountable directly to Parliament you're accountable through a ministry which takes the flag if regulation goes wrong occasionally you appear before a parliamentary committee and if you're sufficiently articulate you can put across the worst of cases and and keep looking at the clock and saying that is lunchtime and you know there are friendly parliamentarians in the committee's who have to take their diabetes shorts in time before lunch and therefore the meeting comes to an end it I've tried this successfully whenever difficult questions whenever I'm making a confessional stay away out of the question it is safe to make it 11 years after stepping out of seve but to to your question why are regulators being increasingly prescriptive regulators always play black pieces you don't have in the real world the policeman who runs ahead of the thief you wait for something to go wrong and then respond unfortunately instead of looking at the laws the rules or regulations available to you your first instinct is to write a new regulation thinking that no existing regulation addresses what is on mind so you have a whole body of regulation some of which is really in some sense restating what exists and the example that I'm fond of giving is that whenever a murder takes place nobody says amend the IPC you go after the guy gate collect evidence and try and hang it with possible but when Satyam happened even corporate India said we need to amend the laws Satyam didn't need any amendment of the laws the existing laws were good enough to deal with something my worry as somebody who spent three years in regulation and a little over 68 years outside of regulation is that regulators firstly should not have a disconnect with the regulated universe I think anyone who has been regulated is a better candidate other things being the same slow being because for being a regulator because you know where the shoe pinches you know what is practicable what is pragmatic what needs to be done you don't need a sledgehammer to go after a fly because people notice sledgehammers and say this guy is very active he's got the sledgehammer and you're only going after a flight you don't need the sledge regulators I think need to step back look at regulatory impact assessment which is critical we all talk about it before you write a new regulation look at what the impact is do you need this regulation all regulation comes at a cost it is the beneficiary of your regulation who picks up the tab at the end of the day so you want to see the the you know the cost-benefit analysis for that person before you write a fresh regulation I think the real problem is a philosophical problem and I want to come back to both of you on this I'll start with you on all of this is premised on distrust of business you believe that if there were no regulations no regulators no laws governing this the businessman will do something wrong in order to enrich himself unjustly so that is the starting point unfortunately of all of this so you set up the six layers that will I spoke about in order to do this will we ever get to a situation where to use a phrase from diplomacy get to a situation of trust but verify instead of distrust and crucified we are now in distrust and crucifying when will be moved to trust but verify you're absolutely right you put your finger on a problem that to my mind is not simply a corporate problem but I think is a problem a mindset for Indian society I grew up at a time sure the same vintage when there was this enormous mistrust of business not simply by regulators or government but by society in general the names of the three largest in industrial houses was synonymous with with you know a kind of abuse if you wanted to abuse somebody you you called in the name of what are those three industrialists or to call somebody of banja was in fact an insult in the old days and then of course if you wanted to you wanted people people here wanted in the old days to get their daughter married to somebody from the IAS Oh ifs never a businessman post the IT boom that refreshing Lee seemed to change and we started getting iconic heroes from business and then of course liberalisation came along things improved during the.com boom suddenly everybody wanted their daughter to get married to somebody or their son to get married a woman who was creating you a new unicorn unfortunately not just in India but even around the world in the last few years there have been spectacular business failures and due to ethical reasons which had a sink set the clock back so I don't have an answer to this how do you change society I think we need to be more vocal with a I think as business we need to put out there and showcase success stories where people have done business the right way recently I think oh there's market cap overtook Maruti's and I remember tweeting that was I am very proud of you because you you chipped it the right way and I did that for that reason because I don't think there are enough stories which are role models we need to put out more of that because really it's not about changing government perception it's what society perception where in India we've slipped back I think business would have come down a few notches we need to work back on that and then it's gonna take time there's no quick fix with this but I do believe that there is this problem i if we can come coming to a more granular level my hunt my belief is that there has to be what somebody called a constructive sense of dissatisfaction between the the executive and the board of independent shareholders a constructive sense of dissatisfaction is not a constructive sense of distrust i think this set constructive dissatisfaction as opposed to distrust is what at least we should try and engineer at the board level the societal change will take a longer time in fact I think I agree with Anand I believe the society has gone the other way it has become even more intrusive than the past I was recently wanting to have a confidential discussion with a friend so I asked him why don't you come over to office he said I won't come over to your office because from your Lobby upwards there will be cameras why do we have them it's back to the whole business about intrusion privacy we need to record everything something funny will happen so we have created a mindset which has become significantly less trust full of the societal aspect same thing how many of us feel comfortable talking freely on a mobile phone and most of the time we switch over to whatsapp why is that there is something which is fundamentally changed in society the that the informal contract of how we communicate how we deal with each other has undergone a very significant structural change and maybe digital ages responsible number of other factors are responsible a mamey liberal civil society is giving to the broader needs of the economy and the country where a little bit of intrusion into what we called as a old-fashioned way of doing things is undergoing as fundamental change and I think this is something which we have to ask ourselves where do we want to be right so that was former semi chairperson M de Madrid the head of the Mahindra Group our own mind rah and veteran banker who their quota in a freewheeling chat on various aspects advances of corporate governance hope you enjoyed that discussion and with that it's a wrap on this edition of amicus curiae thanks so much for tuning in this is Russian Mohan signing off I'll see you next week [Music]