Corporate Governance in India.

The nascent debate on corporate governance in India has tended to draw heavily on
the large Anglo-American literature on the subject. This paper argues however that
the corporate governance problems in India are very different. The governance issue
in the US or the UK is essentially that of disciplining the management who have
ceased to be effectively accountable to the owners. The problem in the Indian
corporate sector (be it the public sector, the multinationals or the Indian private
sector) is that of disciplining the dominant shareholder and protecting the minority
shareholders.
 Clearly, the problem of corporate governance abuses by the dominant
shareholder can be solved only by forces outside the company itself. The paper
discusses the role of two such forces - the regulator and the capital market.
Regulators face a difficult dilemma in that correction of governance abuses
perpetrated by a dominant shareholder would often imply a micro-management of
routine business decisions which lie beyond the regulators’ mandate or competence.
The capital market on the other hand lacks the coercive power of the regulator, but it
has the ability to make business judgements.
The paper discusses the increasing power of the capital market to discipline the
dominant shareholder by denying him access to the capital market. The newly
unleashed forces of deregulation, disintermediation, institutionalization, globalization
and tax reforms are making the minority shareholder more powerful and are forcing
the companies to adopt healthier governance practices. These trends are expected to
become even stronger in future. Regulators can facilitate the process by measures
such as: enhancing the scope, frequency, quality and reliability of information
disclosures; promoting an efficient market for corporate control; restructuring or
privatizing the large public sector institutional investors; and reforming bankruptcy
and related laws. In short, the key to better corporate governance in India today lies
in a more efficient and vibrant capital market. Of course, things could change in
future if Indian corporate structures also approach the Anglo-American pattern of
near complete separation of management and ownership.

It is evident that these tendencies would be strengthened by a variety of forces that are acting
today and would become stronger in years to come:
· Deregulation: Economic reforms have not only increased growth prospects, but they have
also made markets more competitive. This means that in order to survive companies will
need to invest continuously on a large scale.
· Disintermediation: Meanwhile, financial sector reforms have made it imperative for firms
to rely on capital markets to a greater degree for their needs of additional capital.
· Institutionalization: Simultaneously, the increasing institutionalization of the capital
markets has tremendously enhanced the disciplining power of the market.
· Globalization: Globalization of our financial markets has exposed issuers, investors and
intermediaries to the higher standards of disclosure and corporate governance that prevail
in more developed capital markets.
· Tax reforms: Tax reforms coupled with deregulation and competition have tilted the
balance away from black money transactions. This makes the worst forms of
misgovernance less attractive than in the past.
While these factors will make the capital markets more effective in disciplining the dominant
shareholder, there are many things that the government and the regulators can do to enhance
this ability:
· Disclosure of information is the pre-requisite for the minority shareholders or for the capital
market to act against errant managements. The regulator can enhance the scope, frequency,
quality and reliability of the information that is disclosed.
· Regulatory measures that promote an efficient market for corporate control would create
an effective threat to some classes of dominant shareholders as discussed earlier.
· Reforms in bankruptcy and related laws would bring the disciplining power of the
debtholders to bear upon recalcitrant managements.
· Large blocks of shares in corporate India are held by public sector financial institutions who
have proved to be passive spectators. These shareholdings could be transferred to other
investors who could exercise more effective discipline on the company managements.
Alternatively, these institutions could be restructured and privatized to make them more
vigilant guardians of the wealth that they control.
In short, the key to better corporate governance in India today lies in a more efficient and
vibrant capital market. Over a period of time, it is possible that Indian corporate structures
may approach the Anglo-American pattern of near complete separation of management and
ownership. At that stage, India too would have to grapple with governance issues like
empowerment of the board. Until then, these issues which dominate the Anglo-American
literature on corporate governance are of peripheral relevance to India.

Its an abstract from the Report of Jayant Ramavarma -IIM B