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‘Standards In India Above Par’: HDFC Bank Director Keki Mistry On Corporate Governance

For The Core Report Weekend Edition, Govindraj Ethiraj spoke to Keki Mistry about Indian financial institutions and the world of finance at large

By The Core Team
New Update
core report

Earlier this month, Deloitte resigned as the auditor for Adani Ports amid concerns over transactions highlighted in the Hindenburg report. A couple of months ago in June, Deloitte also quit as the auditor of Byju’s. The edtech startup also had three directors step down from its board at the same time. 

While these may point to corporate governance challenges in Indian financial institutions, this is not a new phenomenon. “There are obviously some corporate governance issues in the country,” said Keki Mistry, non-executive director at HDFC Bank and earlier Vice Chairman of HDFC Property. “Unfortunately, what happens is when one bad incident happens, everyone is painted in the same brush. And to solve that one issue, or to rectify that one problem, regulations get introduced, which then become applicable to the lakhs of companies or thousands of companies where governance standards are very good,” he added.

When it comes to governance, Mistry explained that many companies are recognising how critical good governance is, and focusing on it more and more. “I honestly believe that the governance standards in India are above par. And just a few stray examples of that behaviour should not be taken as representative of the entire sector,” he said. 

For The Core Report’s Weekend Edition, The Core’s Govindraj Ethiraj spoke to Mistry about corporate governance, the role of auditors and points of friction within Indian financial institutions, and the world of finance at large, including opportunities and challenges.

Here are the edited excerpts from the interview:

There seems to be, once again, a lot of corporate governance challenges on boards. We have seen various symptoms of that. We have seen, for example, auditors resigning from companies. And we are seeing a spate of that. You have been on at least two significant corporate governance committees, one at CII, one at the Securities and Exchange Board of India (SEBI). So your thoughts first in an expansive way, and then I will get down to the specific. 

Honestly, I think governance issues, people resigning from boards is not something which is new. And it is not only in India that it happens. It happens all over the world. There are obviously some corporate governance issues in the country. We have had so many examples – Satyam was the most classic example, but there are many more that have come about over time. But you have thousands of companies have these governance issues. It does not mean that we should paint the entire corporate sector as one which does not have governance. I do not think that is fair. 

Unfortunately, what happens is the way the media is… when some bad incident happens, everyone is painted in the same brush. And to solve that one issue, or to rectify that one problem, regulations get introduced or requirements are put in, which then become applicable to the lakhs of companies or thousands of companies where governance standards are very good. So we need to take it in the context that, yes, there are a few examples, few cases without naming anyone, where there have been governance issues in the past. But I am sure these things happen all over the world, and if we can just weed these things out and move on… I honestly believe that the governance standards in India are above par. And just a few stray examples of that behaviour should not be taken as representative of the entire sector. 

You talked about how the regulator has responded in a way that has caused increased compliance for everyone.
I do not think it is just regulations. I think it is just everyone, including the media. Everyone starts looking at everyone with a mirror.

Is there an example that you are thinking of when you're saying this?
I mean, I can give you umpteenth examples, but to look at it from a business perspective, there are so many cases where a small little thing happens, and then these things get blown out of shape. I do not think I will be able to give you a specific example at this moment.  

Now, looking from within the company, you have been on boards and your own board for decades. What are the classic issues? Where there is that point where you have to make a decision where, let us say, there is some conscience being tested. 

Very fortunately I have never encountered that problem because I have been very cautious and very careful in selecting the boards where I would join. And I have always said that governance is number one. Everything else comes secondary. Your profits can grow one quarter, grow less, grow more, it does not matter. But governance should not be compromised. And governance means that you have to look at the long term. So I personally have not faced this challenge… But there have been several instances where the board has to look very deeply at some facts. Like, for example, risk management. Risk management is a very evolving subject. So many things are happening on the cyber fund front. For example, cybersecurity. Cybersecurity today has become a huge issue. Third is customer data. If you are a bank, or a financial institution, or even an ecommerce player, you have so much data with you. How carefully are you able to guard that data? Again, this is a question that boards may have to look at, because there may be cases where it may be possible to share that data from a legal standpoint. But from a governance standpoint, should you or should you not? So issues like this keep cropping up, and I think if there is unanimity in the board, if there is a willingness on the part of the board to challenge the management, then I do not see any major….

One of the points of friction, not necessarily the only point of friction, seems to be when there is a family owned and run business. 

If you ask me, in India, there are three or four types of companies. You have family owned companies. It does not mean that because it is a family owned company, governance standards are not good. I can tell you a few companies, and I will just give you one example. Great Eastern Shipping – governance standards are fantastic over there. I am just giving you one. 

I was on the board many years ago, so I know how good the governance is. There are multiple such examples of family companies where governance has been preached, where people will not compromise on the slightest degree… just to generate a little extra profit.

All right, so I will give you one example without naming a company. There was this company where a stray incident happened, where one of the workers was injured, and the chairman in the meeting said, I do not care what it costs. It does not matter, if it means our profits fall 10%, our profits fall 10%, but we must put in place processes, systems, equipment, machinery, which takes care of ensuring that these kinds of things do not happen. That is one example. 

When you go onto a board, the one reason they want you there is to maybe bring in that sense of corporate governance from an ethics point of view.

I think honestly, today, many companies recognise the fact that governance is critical, because if you do not have or you are not practising the best form of governance, the markets will not give you the right value. 

I meet foreign investors. I used to meet foreign investors very regularly. And even now, after leaving HDFC, I still get a lot of foreigners calling me. And always, I know for a fact that the one thing foreigners will first look at is governance. Even if the company is extremely profitable, if there are issues around governance, serious issues around governance, they will not invest in that company. So you will see the valuation differential between companies which are well governed versus companies which are not well governed, it is huge. And I think the Indian corporate sector, including family owned companies, as you put it, even these family owned companies recognise the fact that if they practise good governance, their valuation will get significantly enhanced.

And I will ask you for a layperson or a student to define what well governed means in a second. 

I think governance is just putting it very simply — governance is doing something which you would not be ashamed of or worried about, or scared if it got reported on the next day in the newspapers, if you know what I mean. 

You said there are only a few examples or a few bad eggs. And at the same time the point you made about foreign investors, and I have seen it too, that is the first question they seem to ask. Now, if it was only a few bad eggs, then why would they be so concerned? And why would that be on top of? 

Because again, with due respect, the media, the good never gets talked about, the bad always gets talked about. So even though there may be ten companies or a handful of companies where there have been governance issues, inevitably most people will focus only on that. You focus on the bad. You do not focus on the good because the good is happening, it will continue happening.

When you go onto a board, what are the first things that you ask for any board? 

If it is an unlisted company, to make sure that it is being run like a listed company, in the sense that a listed company has certain disclosure requirements. Is this unlisted company willing to make those disclosures? Listed companies have to prepare quarterly accounts. So are those quarterly accounts getting prepared? If they are not, why are they not getting done? You need to talk to the auditors. 

Forget examples of some auditor resigning, that is a stray example. But talk to the auditors, see if they have any concern. Talk to rating agencies, if the company is being rated. See if they have any concerns. Talk to proxy advisors if it is a listed company, see if they have any concerns and then take a call. That is the first thing you would look at. 

And then you would see how the board is being run. It does not mean that you need to have two-day board meetings. No, it does not mean that. A board meeting can be very efficiently carried out in a matter of half a day, as long as many of the issues which are contentious or which require some degree of decision-making are discussed, not necessarily in that boardroom, but even outside the board. 

Let me ask you a flip question. SEBI has been asking for quarterly results for several years. But within that, the nature of disclosure from a demand side as well as the regulatory pressure is increasing. Are all Indian companies ready for it? 

I am sure that some of the reporting that companies are required to make, and I am not necessarily referring to quarterly results, could be six-monthly results, could be annual results, could be anything. Some of those requirements can, if you really apply your mind, look at certain processes, see if those processes can be eased out. I am sure that is something which regulators will and probably would at some point of time look at. 

There could be certain processes that companies are to fill up – forms to be filled up registers which can be relooked at to see whether all of these are necessary. Some of these could be cut short. Some of these could be made applicable only to the top 300/400/500 companies. 

Amongst companies whose boards you have been on, or you have seen outside of that, what are the classic mistakes that people make in not adhering to these requirements or these demands? 

I do not think anyone does this consciously. Could happen once in a blue moon where some filing gets delayed by a day or two days for some obscure reason.These things can happen. If there is a penalty, you pay the penalty and move on. It is not that these things are ever done intentionally. 

If I'm sitting on the board, I am not going to check or I am not going to sit on making sure that the company secretary is filing every single document that he's required to file. Now, if he misses filing some document or there is a delay in filing that document, then whoever is a regulator in that particular case, it could be SEBI, it could be the Ministry, it could be RBI, it could be IRDA… would pull up that company and probably levy some fine.

And you, for example, have dealt with six regulators. How is that then?

I mean, very good, I must say. The regulatory system in India is impeccable. I honestly, truly believe that the regulatory system that we follow in India, whether it is SEBI, whether it is RBI, whether it is IRDA, whether it is a Pension Regulator, is absolutely fantastic… It does not mean that one stray case may not slip through. It can slip through, but 99% of problems will get detected if there is a problem. 99.9.%

The last question on auditors. Now, auditors are human like everyone else, but sometimes they represent big brands and they have reputations to uphold. What should companies think of when working with auditors? Because auditors can sometimes get very demanding. 

Auditors are now getting pulled up for small, small things which happen in a company. It is not necessary that every single problem that is there in a company will get detected. At the end of the day, the auditor, out of million transactions, is auditing a sample. It could be 10,000, could be 20. Whatever it is, some sample is being… so in the sample which is not selected, if some issue does come up, it can come up. Auditors have become more conscious now, or more worried now compared to what they were in the past, because the regulators have started taking action against them. We saw what happened in Satyam, we saw what happened in ILFS. So there have been instances where the auditors have been put to task or pulled up for a variety of reasons, and therefore they are becoming that much more cautious or that much more careful in what they sign.

And the last sort of related question on this issue. Let us say you have a disagreement with your auditor and it maybe looks like it is going to spin out of control. What should you do? Should you, for example, fight with the auditor publicly? 

No, I do not think that is the right way to do it. I am sure there is a way of convincing the auditor to your point of view. Or at the end of the day, you accept what they are saying and put a qualifying note saying that we do not agree with this view. In our view this is the way it should get done. But finally, the accounts have to get signed. So to get the account signed, first, you make every possible, conceivable effort to convince the auditor. 99 out of 100 times you will be able to do it, if you are right.

Theoretically, if you are not able to convince them, then my advice to the company is to adopt what the auditor is saying rather than getting a qualification in the accounts. And you can put your point of view in public domain saying that whilst this has been done because your auditors wanted it, you personally think this should not be done because of this reason. 

Let me come to the external part now. The world of finance, I am not specifically talking about mortgages or banks, but in general, where are we? 

Very underpenetrated. I think the financial services sector in India has phenomenal opportunity to grow. You see, the biggest advantage we have in India is that we have a young population. Two thirds of our population is below 35 years of age. And as people grow older and older, their incomes start increasing, obviously.  As their incomes earn, their ambitions increase in life. They want to spend more money, they want to buy more things. So financial service products are the first thing that comes to mind when anyone's moving up the ladder. It can be property, it could be a credit card, it could be a consumer loan, it could be a car loan, it could be travelling abroad when taking a loan to travel abroad, all kinds of things… Clearly the per capita income in India is increasing and has been increasing year on year. And for that, you have to give credit to the government for what they have done. They have really eased the process, made sure that the underserved are given facilities, given the ability to raise funds, to do some business, to earn some income. 

What would you say are the structural challenges of growing the financial system and within that, let us say, mortgages? 

I do not think there is any real structural challenge as such. I honestly think that the growth is there, and the growth will happen as the economy keeps growing. And I truly believe that the economic growth in India can be extremely strong. 

I said this a year ago, and I said this two years ago also, that I believe that after the pandemic, India will grow faster than almost any country in the world. And I have been seeing that happening. China is slowing down. China is having its own challenges. We are growing. We are growing faster and faster. We have good leaders. We have good economic policies. We have very good regulators. We have a growing population. We have a population where people are aspiring for bigger and better things in life. So the scope to grow is just phenomenal.

But when you are looking at growth, you should never look at one quarter or two quarters. These numbers tend to be misleading. You look at it from a five year point of view or look at it from a ten year point of view, and you can very easily ascribe a certain CAGR growth in the years to come, which would be faster than you would see in most other countries. 
Every year, the growth is faster and faster. Mortgages grew at 15% for the system as a whole. 15% growth in a base as big as this is, is not a small growth at all.
Again, coming to mortgages specifically because that was our business. People in India do not buy a house when they are 20 or 25 years old. The average age of a first time home buyer in India is about 38 or 39 years. And I told you earlier that two-thirds of India's population is below 35 years. So in reality, two thirds of our population has not even thought of buying a house. But with every passing year, you are going to have more and more of these people who will reach an age where they will need to buy a house. So I think there will be a structural increase in the demand for housing. And why only housing? Every kind of financial service product, as we keep growing, as people start growing… because of our young population.

Do you feel this is a supply side or a demand side problem? 

I do not think there is a supply side issue. I think there is enough availability of liquidity in the system. There is willingness to take risks. I do not think risk averseness is that high in India. I think it is a demand issue. And the demand issue is because people are not needing that today. If I am 25 years old, I am staying with my parents, why would I want to buy a house? 

Since you mentioned Covid as a turning point… What are the changes that you have seen in the way people take loans?

I think demographic willingness to borrow money today is much better or much greater than was the case, say, 40 years ago. When I started working in HDFC for the first time, in 1981, at that time, there was a certain feeling of shame when you went to borrow money…that has changed over time. Today no one is worried about taking a loan. So willingness to borrow money is now like any other country in the world.

But Indians, by nature particularly compared to the Western countries, are much more conservative… So people will not go and borrow to the hilt and start over-leveraging themselves and run the risk of losing a house… so people are that way much more cautious in India than they would be in the Western world. And that's why you would see the defaults in India, relatively speaking, on personal loans, individual loans, housing loans, car loans is a lot lesser than what you would see in some of the other countries.

Where are we in the liquidity sense? I mean, the RBI has sucked out a lot of liquidity. There is obviously a feeling that there is going to be an asset bubble as reflected by that action. How are you seeing things in the next three to six months?

First of all, liquidity was really put into the system in a big way during the Covid time. And I really honestly believe that we handled the Covid situation better than almost any country in the world. Whether it was a government, which did not go overboard in terms of giving out grants and always kept the fiscal position in mind, or it was the RBI which did not just keep printing money and flushing the system with liquidity. But they did targeted lending to make sure that no sector in the economy or no company in the system gets affected or is hurt in a significant manner. So all kudos, fabulous job done by government and the RBI. 
At that time, the quantum of liquidity in the system had to be increased. Slowly over time,that liquidity is getting sucked out. I don't think liquidity in today's context is a serious problem or is a big worry. It is just that the excess liquidity was there. Some of that liquidity has been pulled back.

And if you cast your eyes now across the Atlantic, for example, we are seeing yields go up in the United States, which has caused all kinds of other problems. How are you seeing things in terms of flows globally and into or out of India? 

I think globally, flows are still coming into India, both in the equity market and to a great extent, also in the debt market. Flows are coming into India because India is a very attractive destination for foreigners today. When you talk to foreigners and you ask them which country you would like to invest in the most? And if they were to give you an impartial answer, nine out of ten people will tell you India, because India is a very attractive destination for foreign investment, because the growth that we are seeing in India today is unparalleled, and that growth can continue for a long, long time to come. 

I have consciously stayed away from asking you HDFC questions. But let me ask you one question to end – what is your unfinished agenda? In some ways, what would you have liked to have done or finished in HDFC?

Long term merger was something which made tremendous sense because the mortgage product, the way it was before the merger, was to some extent complicated. The Bank used to source loans for us. They would bring the application form to us. HDFC Limited would do the credit appraisal, legal checks, technical checks, disburse a loan. Then the bank would have a right to buy back up to a certain percentage of those loans. And we would retain some part on the portion the bank would buy back, there would be some fees that we would continue getting. So it was not the smoothest and the simplest way to do a loan. And therefore, a merger in the long term did make tremendous sense.
We examined this in 2014 also, and we found that it did not make sense this time when we examined it. 

I don't think there is any unfinished agenda. I mean, you can always say one particular loan, this could have been done better, that could have been done better. That is a different issue.



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