Since it was introduced two years ago, the amended "Clause 49" of the Securities and Exchange Board of India's listing agreement has been in focus across the corporate universe. This pertains to corporate governance. One key provision - at least one-third of the board must consist of independent directors. Other measures include stronger audit standards and better financial disclosure norms.

This is all very well meant. But the refrain across smaller companies is that it leads to major hikes in compliance costs and doesn't make much actual difference to the quality of governance. There are too many ways around the letter of the law. For example, given extended families, it's possible to put together a set of independent directors, who are all friends of the promoter's second cousins.

Clause 49 created a new niche called the "Indy Director" since demand for good "Indies" spiked while the supply of high-quality Indies remained very limited. As one CFO put it, it was akin to suddenly expanding the ICC Elite Umpires Panel to several thousand half-competent individuals from a handful of highly competent ones.

Working academics suddenly found themselves being stalked as they are seen as the most desirable Indies. Having a well-known B-School professor on the board is seen as an intangible asset similar to goodwill on the balance sheet.

IT consultants also rubbed their hands and addressed the putting together of compliance solutions that small/mid-sized businesses could implement. Certainly, the marginal costs of compliance rose substantially for smaller businesses once Clause 49 came into effect.

Well, two years after Clause 49, India Inc is inured to producing independent directors and generating better financial disclosure. By and large, the quality of financial information has definitely improved though this could have more to do with the desirability of accessing overseas funding than compliance with Clause 49.

But if the Satyam [Get Quote] Maytas imbroglio is any guide, Clause 49 has not had that radical an effect in preventing misgovernance. The rash of high-profile resignations on Satyam's board came after the fact. Initially, the directors went along or it slipped past them unnoticed. Given the US billion-plus dimensions of the deal, either is culpable.

For that matter, Satyam didn't break the bounds of Clause 49 and legal compliance was not really the issue here. What mattered was the market's reaction. The market value of the company almost halved when the deal was announced.

The promoters must have weighed up the sweetness of the Maytas deal versus their plummeting overall net worth and decided it was simply not worth it. Unlike a legal situation, it was over and done with in a flash. The deal was announced. Share price dropped immediately. The deal was cancelled.

We've seen the power of the market earlier as well when the DLF IPO was withdrawn in 2006. At that point of time, the minority shareholders created a fuss alleging they had been deprived of the chance to subscribe to a rights issue during the period that DLF was delisted. As a result, their benefits from the IPO would be minimised.

Bad publicity would have killed the IPO. Sooner than risk the IPO going haywire, DLF withdrew the issue. It came to a settlement with the minority shareholders and then re-launched the IPO a year later. More than any fear of the legal consequences, it was surely respect for market forces that prompted this decision.

These are high-profile situations affecting market leaders. In smaller companies, the power of the market and the fear of bad publicity is less. One pernicious form of abuse is the random amalgamation or de-merger of unlisted group companies with a listed entity.

This happens all the time and sometimes assets such as a major brand are also spun off from the listed entity into an unlisted one. That means minority shareholders don't get the benefit of the brand and may indeed be paying license fees. Given labyrinthine corporate laws and glacially slow legal processes, such situations are likely to keep cropping up. However, poor corporate governance does affect credibility and in turn, that affects valuations and the company's ability to raise money or do business.