My Article in Fin Express@Campus - November 9th edition

Guess im improving on my writing skills :)

Find below my article on Financial Express November 9th edition. It was written for FE@Campus contest and i was lucky :) The topic given was "Corporate governance issues that came to fore with recent Reliance Communication issue of inflating revenue".

“The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to centers of economic activity that inspire trust.” -Sir Adrian Cadbury

The issue of Reliance Communication reporting inflated wireless revenues to bourses for improving its valuation and at the same time underreporting its wireless revenues to TRAI for avoiding license fees is a typical corporate governance problem arising out of multiple reporting standards. Nowadays, a company’s innovations do not stop with its products and extends to finding innovative ways of using the loopholes that these multiple reporting standards provide. According to Parekh and Co., an independent audit firm appointed by DoT for looking over this issue, RCom had reported revenue of Rs. 15,213 crores to the stock markets for FY07-08, a 23% over its actual revenue of Rs. 12,298. At the same time it underreported its wireless revenues to TRAI and doing so it avoided license fee payment of Rs.224.79 crores for FY07-08. Moreover this was not the first time RCom avoided the license fee by underreporting. It avoided Rs.91.11 crores license fee for FY 06-07 by adhering to similar practices as per the Parekh and Co. report.

The above issue raises some serious concerns over the relevance of corporate governance to the corporate performance. The excessive importance for short term profits can have major impact on upcoming sectors like Indian wireless market in a long run. Companies should realize this and adhere to proper reporting standards for its sustainability. But it’s easier said than done due to the different needs of its stakeholders and hence the regulatory bodies need to play a pivotal role. In RCom’s case the regulatory bodies SEBI and TRAI failed to check the consistency of the financials submitted by Reliance communication with each other. The whole issue was brought to forefront by Kotak securities an equity research firm after two years of license fee evasion by RCom causing a total loss of Rs.315.90 to exchequer. When the need for different reporting standards is unavoidable, in such case the different stakeholders including regulatory bodies need to work in liaison to avoid such corporate governance issues.

Even though RCom’s corporate governance issue is no where comparable to Satyam, Enron, WorldCom and Tyco, the seriousness of the issue needs to be addressed properly. This brings to forefront the inefficiency of the penalties that companies might face if in case of any corporate governance issues. The implications that RCom might face if incase proved guilty will be a fine by regulators and the stock price will adjust according to its actual revenues. The impact on stock price might be minimal as the money involved is less compared to other major corporate scandals, and hence will not be effective enough to stop the companies from doing so in the future. Hence a proper watchdog and relatively heavier penalizing mechanisms should be in place to prevent such issues in the future.