Evolution of Corporate Governance in India
Understanding the meaning of corporate governance Recent corporate scandals have focused attention of corporate governance for all the wrong reasons. There is a need to cut through all the sensational corporate governance failures, like the case of Satyam, to understand what is the meaning of corporate governance. Corporate governance in the Indian context spells out clearly that ethics and values form the bases of corporate governance, while adherence to the legal framework is the minimum requirement. Confederation of Indian Industries (CII) - Desirable Corporate Governance Code (1998) defines it as "Corporate Governance deals with laws, procedures, practices and implicit rules that determine a company's ability to take informed managerial decisions vis-à-vis its claimants - in particular its shareholders, creditors, customers, the State and employees. There is a global consensus about the objective of 'good' corporate governance: maximizing long-term shareholder value." The primary purpose of corporate governance norms is to ensure that managers protect the investment of the owners (scores of minority shareholders of the company's stock) and maximize their returns on such investment. The goal of this research paper is to understand the evolution of corporate governance in India, against the backdrop of the history of India's stockmarket, its corporate culture and the government attitude that strongly influenced the way business was conducted. Corporate governance in India: An overview Historically Indian companies had no incentive to show higher profits on their books and enhance shareholder value. This was on account of a very high tax structure - both personal/corporate and also wealth tax. The private sector was also denied access to the equity market at fair market valuations due to strict control of the pricing of public issues by the erstwhile Comptroller of Capital Issues. The combination of high taxes and low valuations left no incentive for good corporate governance. The early beginnings of corporate governance was an outcome of therepealing of the Capital Issues (Control) Act, 1947, in 1992 paving the way for market forces in the determination of pricing of issues and allocation of resources for competing uses. Tax rates were reduced from a peak 97 per cent to 56 per cent in 1991 and 30% in 1997. Due to recent imposition of a surcharge and cess, it is almost 34% today. Indian companies experienced the euphoria of market pricing and market driven valuations for their company. Corporate managementealized that good governance yielded commensurate returns. Though India has not experienced large scale corporate scandals likethose experienced by the U.S., this is more a result of a convergence of the interest of management and owners (both constituted by thedominant promoter-family/dominant government holding), ratherthan because of higher standards of corporate governance. The predominant issue in India is the conflict between "dominant" shareholder-promoter groups and minority shareholders. There are around 250 big and small listed companies with promoter holding of over 75 per cent each. The prominent among them are Wipro, Tata Consultancy Services, Jet Airways, DLF, Puravankara Projects, AkrutiCity, Omaxe, Plethico Pharmaceuticals, Sobha Developers, Mundra Port, BGR Energy, Blue Dart, Parsvnath Developers, and Bosch Chassis. The promoters, in most cases, currently hold over an 80 per cent stake in these companies. Unlike in Japan/Germany, where banks play a critical role, as creditors, in the corporate governance of companies, in India, though banks/ FIs had large debt exposures to the Indian corporate sector, (and with a conversion clause in the loan agreement the debt was often converted into an equity holding) several studies have shown that they did not exercise close monitoring of the corporate governance standards in these companies. It is observed that in the Indian context, the external market exercises a limited force on corporate governance (since the floating stock in the secondary market is limited). Nor is the internal force of a strong Board (since management and Board members are, very often, from the same dominant promoter group) always effective in protecting the principles of sound corporate governance. Despite globalization, and an increase in foreign institutional investment in Indian companies, institutional activism is also weak and yet to emerge as a strong counter force. Institutional investors, both domestic and foreign, are more prone to vote with their feet, by exiting the stock, than to influence a change in management behavior. India needs a market driven corporate governance culture with greater participation from Indian retail investors, either directly or through mutual funds; entry of government pension funds into the equity market in a really competitive mode, with checks, balances and transparency in line with the Norwegian sovereign fund's high standards of corporate governance and a close, alert regulatory oversight to ensure compliance with the well-drafted codes and clauses. Corporate governance goes beyond crises, committees and compliances. The corporate board reflects the spirit of corporate governance of a company. To understand the corporate governance of a country it is imperative to understand the framework of its corporate boards. Author’s Profile Prof. Dr. Uday Salunke Director - Welingkar Institute of Management is a mechanical engineer with a management degree in 'Operations', and a Doctorate in 'Turnaround Strategies'. He has 12 years of experience in the corporate world including Mahindra & Mahindra, ISPL and other companies before joining Welingkar in 1995 as faculty for Production Management. Subsequently his inherent passion, commitment and dedication toward the institute led to his appointment as Director in 2000. Dr. Salunkhe has been invited as visiting fellow at the Harvard Business School, USA and European University, Germany. He has also delivered seminars at the Asian Institute of Management, Manila and has been awarded "The Young Achievers Award-2003" in the field of Academics by the Indo American Society recently. About Author Dr. Uday Salunkhe is presently the director of the Welingkar Institute of Management Development Disclaimer: Article submitters are solely responsible for the content of their articles. ArtiLib can't be held liable for the contents of the articles. Report Abuse | Browse By Category |
| Contact ArtiLib| Privacy Policy| Terms of Service |