2. INTRODUCTION
India & China are world’s top most emerging markets that
have a strong desire to become global players through
sizeable acquisitions and by increasing an access to
international capital markets.
However many corporate scandals in these economies
have brought governance weaknesses to the attention of
the general public at large.
As these scandals had a huge impact on investors’
confidence and thus hindered their progress of economic
development.
Therefore, It is very important to examine the
effectiveness of governance mechanism in avoiding these
corporate scandals especially in transition economies. 2
3. METHODOLOGY
The present paper is based on the information
collected from various secondary data sources:-
Articles published in leading journals
Websites
Books, Journals, Working Papers
Newspapers, On line News Channels
Industry Reports
World Bank Database
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4. OBJECTIVES OF THE STUDY
1. To compare and analyze the corporate governance
systems & discover the major obstacles in governance
implementation of India & China
2. To examine the corporate performance of India & China
based on leading macro governance indicators
(Source: World Bank Governance Indicators – 8th Annual
Update)
3. To analyse the various parameters of doing business in
India & China with a view to consider such factors
while framing/revising corporate norms
(Source: Doing Business Database - World Bank 2011 Study)
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5. CURRENT SCENARIO - GOVERNANCE OF INDIA & CHINA
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Similarities
1. Too-rapid economic development
2. Significant private public foreign investment
3. Economic & structural reforms
4. Shared interest in Anglo American Corporate Norms
Differences
Criteria India China
Starting Point of
Reforms
Reforms started with the
private sector first in late
90s and later it became an
issue for the public sector
as well
Reforms focused first on public sector
firms and then later on private sectors
from 1971 onwards
Legislation More transparent &
shaped more by the rule of
law
Considerable Opacity in determining:
•who is drafting laws,
•with what degree of technical
expertise and
•in the service of what policies
Judiciary Judiciary operates at
somewhat glacial time
frame
More experienced with
commercial matters
Chinese courts are technically less
competent
These are not as
autonomous/politically independent as
their Indian counterparts
6. 6
Major driving forces behind governance reforms
(India & China)
Unethical Business
Practices
- Security Scams
- Disappearance of Companies
- Misdeed of Companies
Impact of Globalization - Integration with Foreign Markets
- Foreign Investors Expectations
- New Business Opportunities -- IT
& ITES, BPO etc.,
- New Capital Formation – FII, FDI
Impact of Privatization - New Ownership Structures
- Multinational Companies
Market Driven Economy - Increased Competition
- Free Market Forces
Efficiency is a now a key
factor
- Boost International Trade
- Optimum Resource Utilization
- More Returns & Least Cost
7. 7
Analysis Table - Comparison of Corporate Governance Mechanisms
Criteria India China
Applicability of Corporate
Governance Rules
Listed Companies Publicly held corporates that can be listed
or non-listed.
Ownership Structure More diverse share ownership
including family and some
government-ownership.
State ownership of entities
Role of Institutional
Investors
Lacking role of institutional investors Institutional investors role is lacking.
Regulatory Framework Weak institutional framework
Regulatory overlap weakens
enforcement.
Overlap of BOD & board of supervisor’s
duties
Board of Directors &
Supervisors
Between 33%-50% independent
directors.
Family-owned business influence
independence.
At least 33% independent directors.
Supervisory board can overturn director
decisions.
Compliance &
Enforcement Efforts
Certifications of financial & internal
reports by CEO, MD & Audit
Committee respectively.
Requirement of certifications of financial
statements and internal reports are not
addressed.
Requirement of
Independent Board of
Directors
Lack of independent members of the
board of directors in practice despite
requirements to the contrary.
Independent directors recommended by
stockholders
Corporate Governance
Report
Comply or explain noncompliance with
mandatory recommendations by
external auditors assessment.
Comply or explain the gaps between
existing practices & recommendations in
the code; No penalty for failing to do so.
8. 8
Criteria India China
Quality of
Governance
Much better Less in comparison to India
Institutional History Years between 1947 and 1991, the Indian
economy was always 50% in the private
sector, And as such, notions of governance
were not entirely foreign to the Indian private
sector.
Between 1949 and the mid-1970s was a
relatively closed economy.
Information Noisy & unbiased i.e. no one is willfully
distorting the truth
Noise free but biased
i.e. clean story but story isn’t right always
Running of Financial
Markets
Equity markets function very well making
India a safer choice for international
investors
Financial markets don’t work very well as all
stock prices move together
Corruption India is close to the bottom of international
list of transparency as it only just shuffling
money back & forth and not generating
value for society
China is also close to the bottom of that
international list of transparency
But it does a little bit better than India due to
its constructive corruption since it generated
some value to the society
Pressures to Reach
International
Standards
Highly pressured to the market forces in
order to stay in competition and boost
international trade & development because
of its lacking reserves & other sources of
inputs
However , Indian Companies have an edge
over the Chinese in reaching international
standards of governance.
Less pressured as they have huge capital at
their disposal because of their $1.5 trillion in
foreign exchange reserves
9. FINDINGS
RESEARCH OBJECTIVE ONE
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Obstacles in Structural Reforms Implementation
India & China
Weak Institutional
Framework
-Overlapping Duties & Responsibilities
(BOD, Audit Committee, Non-Management Directors,
and Supervisors)
Limited Activism of
Institutional Investors
- Lack of Industry Knowledge & Expertise
Lower Board
Independence
-Ownership Structures
(State Ownership, Family Owned)
- Stakeholders Recommendations
Business Models - Traditional Ownership Structures
Poor Compliance &
Enforcement Efforts
- No Certifications Required
- No Penalties for gaps
Weaknesses in Judiciary - Delays
- Poor Functioning
Political Interference &
State Participation
- Important Matters
- Management Decisions
10. ANALYSIS & FINDINGS
RESEARCH OBJECTIVE TWO
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As per World Bank 2011 report, India
is ahead of China in terms of rule of law
(54th) & control of corruption (35th) but
left far behind in regulatory quality
(39th) as compared to China at 44th, 32
and 44th respectively.
This indicates that India needs to
improve its regulatory quality by
removing various obstacles in the path
of enforcement, compliance & reforms
implementation
Whereas for China, it should
emphasize on improving its rule of law
and make various amendments with a
view to control corruption & maintain
transparency in line with international
standards for enhancing their foreign
investments and to achieve rapid
economic development.
39
54
35
44
44
32
0 10 20 30 40 50 60
Regulatory Quality
Rule of Law
Control of Corruption
Governance Parameters
(2011 Ranking)
China India
11. ANALYSIS & FINDINGS
RESEARCH OBJECTIVE THREE
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In World Bank 2011 report, India has
been ranked at 87 as compared to China
at 139 in doing business with them
China is ranked much better than India,
therefore it needs to focus just only on two
areas i.e. protecting the investors &
getting the credit
Whereas India still lags in a number of
issues: paying taxes, trading across
borders, enforcement of contracts and
resolving insolvency
Hence, for both the transition economies
while establishing or revising their own
company’s corporate governance rules:
Adopting a new governance
structure based on such factors
will be of great help
87
64
72
17
61
119
93
150
139
37
140
182
107
165
44
166
0 50 100 150 200
Doing Business (2011) Rank
Getting Credit
Resolving Insolvency
Enforcing Contracts
Trading Across Borders
Paying Taxes
Protecting Investors
Starting a Business
Ranking
Doing Business
Parameters (2011)
China India
12. SUMMARY
CHALLENGES/REFORM ISSUES
In both the countries - reform and enforcement
efforts by regulators is lagged
And many of the reforms that have been adopted fail
to address fundamental areas of concern such as:
the relationship between controlling and minority
shareholders,
the role of promoters,
the limited activism of shareholders, including institutional
investors, and
issues with director independence.
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13. SUMMARY
UNIQUE POLITICAL & SOCIAL PRESSURES
These challenges may prevail because they have
been shaped by unique political and social forces.
Such forces include:
the traditional closed ownership structures,
an ineffective institutional framework to support
enforcement efforts,
weaknesses in the judiciary, and
political pressures related to government ownership of
certain industries.
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14. CONCLUSION
Concluding Remarks
The main issue for China now is to convince foreign investors that
state-owned enterprises and state interference will not impede the
efforts of multinationals to operate in that country.
For India, it is more a matter of creating the mechanisms to enforce
good governance practice as already embodied in various committee
reports.
That is ………
India needs simplicity whereas China needs little tightening!!
Scope for further research
In this short study we cannot expand in further detail the potential
solutions to these challenges, it is hoped that further research can
help develop solutions that take them into account.
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