5 companies that score poorly on corporate governance

In January 2009, in what was perhaps corporate India's largest frauds, Satyam Computer founder R. Ramalinga Raju resigned after admitting that the company had cooked its books and was overstating its profits.

More recently, Reebok India filed a criminal complaint against former top employees, Subhinder Singh Prem and Vishnu Bhagat, accusing them of a financial fraud of up to $233 million.

The BFSI (banking, financial services and insurance) companies, too, have often been pulled up for not adhering to corporate governance norms.

Indian microlenders had faced severe criticism in 2010 for flouting corporate governance practices and adopting coercive tactics to recover money from borrowers. This allegedly led to suicides in Andhra Pradesh, prompting the state to enact a law in October 2010.

All these issues, at some level or the other, talk about the lack of implementation of corporate governance. In India, corporate governance in private limited companies is not mandatory by law.

In a report by Espirito Santo Securities, the brokerage released a list of five companies that have scored poorly on corporate governance along with the reasons:

Dhanlaxmi Bank: The whistle blower letter from the Union government to the RBI regarding the bank's accounting practices, along with the significant uncertainty surrounding the bank's strategy post the management change, has caused significant losses to shareholders. The brokerage has downgraded its rating to red for the way the bank has handled the events surrounding the management change.

Biocon: Aggressive accounting treatment of deferred revenue coupled with historic capitalization of biosimilar insulin R&D will, said the brokerage, likely result in a consistent inflating of EPS for six years in a row from FY10-15. The AxiCorp acquisition and divestment transactions raise a red flag given the transaction structure and cash in/outflow.

3i Infotech: The company did two back to back QIPs to retire debt. Despite raising Rs 5 billion, debt levels have increased as most of the money has been wasted, the brokerage said. During the quarter following the first QIP massive earn-outs, which were not disclosed in the QIP document, were paid and QIP proceeds were invested into an e-governance business, later discontinue. This warrants a red light, according to the brokerage.

Financial Technologies: The brokerage says it maintains its red flag on corporate governance due to lack of consolidated quarterly reporting and disclosures, which it says is below par, and lack of communication with Investors and analysts, for there have been no conference calls or analysts meetings in the past two years. A substantial proportion of the company's standalone revenues are from related parties, the brokerage says.

Educomp: The brokerage says the key issues for a red flag are, 1) common address of registered office of Edu Smart (SPV, or special purpose vehicle) and its statutory auditor, 2) the cost of resource co-coordinator, that should have been borne by the SPV, is being borne by Educomp and the SPV is not being consolidated, which is negative for minority shareholders of Educomp, 3) high turnover of company secretaries at the SPV which casts doubt on overall compliance policies, and 4) executive director of K-12 segment at Educomp was the first signatory to the MOA of SPV.

Based on a report by Espirito Santo Securities