The document discusses the distinctiveness of corporate governance in India. It notes that while India has some of the best investor protection policies on paper, enforcement has been a major issue. Ownership is highly concentrated, equity markets are still developing, and independent directors have traditionally had weak positions on boards. Several corporate scandals in the 1990s exposed vulnerabilities and drove reforms, but full development of governance standards, transparency, and protections is still a work in progress.
2. INTRODUCTION
• India became independent in 1947
• Its population amounts to nearly 1.2 billion (almost double of entire Europe)
• It is a complex country where the ideas of corporate governance are still in a very
nascent, however, an interesting phase
• It is the 9th largest economy in the world, with a current economic growth rate of 7.0%
(2011-12)
• The roots of the corporate structure is colonial in nature and laws are modelled around
the common law
2
3. HISTORY
• After independence India moved away from its capitalist past towards
more socialistic corporate policies.
• The 1951 Industries Act required all the industrial units to obtain licenses
from the central government
• The public sector dominated the economy with enormous state-owned
enterprises, dragging India in to a culture of nepotism, corruption and
inefficiency, with little accountability of the government
• The Indian equity market was not sophisticated enough to counter the
abuse by these companies
• The absence of a corporate governance framework worsened the problem
• While on paper India had probably one of the best investor protection
policies, however, enforcement was a major problem
3
4. HISTORY
Post liberalization period (1991)
• The most significant development in the Indian industry has been the development of the
Securities Exchange Board (SEBI) in 1992 which has played a crucial role in implementing
basic corporate conduct in the country
• Another landmark event has been the adoption of clause 49 into the Listings agreement
introducing independent directors
4
5. KEY CORPORATE GOVERNACE ISSUES
• Concentrated Ownership
• Unsophisticated Equity Market
• Vulnerable Stock Markets
• High levels of corruption
• Weak position of independent directors
• Failure of boards
5
6. DRIVING FORCE FOR DEVELOPMENT OF
CORPRATE GOVERNACE
• Series of scandals
• Misdeeds by companies
• Impact of globalization
• Privatization
6
7. HARSHAD MEHTA SCAM
• Harshad Mehta a stock broker in 1990’s was considered a stock market superstar due
to his stupendous rise in the market
• Was the main reason for the market crash in 1992
• Mehta siphoned off 800-millon dollars from the banking system
• Several key players were arrested, exposing the vulnerability of Indian stock market to
manipulations
• This was followed by incidents of companies allotting preferential shares to their
promoters at deeply discounted prices as well as those of companies simply
disappearing with investors’ money
7
8. POST HARSHAD MEHTA
• Post the widespread scandals in the 1990’s several codes for corporate governance
were designed
• The significant ones being the CII code for Desirable Corporate Governance code
(1998), the Kumar Mangalam Birla Committee (2000) followed by the Narayana
Murthy Committee (2003)
• These led to the development of the clause 49 of the listings agreement dealing with
independent directors and the subject of shares transfers
8
9. OWNERSHIP
• Ownership is concentrated wherein 500 largest companies together account for 90% of
market capitalization of the Bombay Stock Exchange
• About 11% of companies comprising about 22% of the market capitalization are
companies wholly or significantly owned by the Central (Federal) or State Governments;
about 20% of companies comprising about 8% of the market capitalization are non-
Group companies controlled by Indian promoters; and about 9% of companies
comprising about 5% of the market capitalization are non-Group companies controlled
by foreign promoters.
• Family run business firms account for 60% while the private sector accounts for merely
20%
• Even in 2005 the shareholdings of promoters in these firms is close 50% in almost 3000
companies
• State owned enterprises account for 20% of market capitalization
9
10. OWNERSHIP (2)
• There has been a shift in the concentration with the entry of domestic and
foreign non-promotional investors, however, it is too early to witness a change
in the ownership patterns
10
11. INDEPENDENT DIRECTORS
• According to, Omkar Goswami, “the greatest drawback of corporate governance
in India is the de facto lack of independent directors on the vast majority of
boards. This is not caused by a lack of supply, but reflects the lack of demand,
given the prevailing attitude that boards are empty legal constructs that exist
solely to justify the perpetuation of existing management.”
• Indian law does not currently require director nominations by an independent
nominating committee of the board, thus directors are typically nominated by
controlling stockholders
11
12. Clause 49 Listing agreement
As per Clause 49 of the Listing Agreements an ‘independent director’ shall mean
non-executive director of the company who
a. apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
senior management or its holding company, its subsidiaries and associated
companies;
b. is not related to promoters or management at the board level or at one level
below the board;
c. has not been an executive of the company in the immediately preceding
three financial years;
d. is not a partner or an executive of the statutory audit firm or the internal
audit firm that is associated with the company, and has not been a partner or
an executive of any such firm for the last three years. This will also apply to
legal firm(s) and consulting firm(s) that have a material association with the
entity.
e. is not a supplier, service provider or customer of the company. This should
include lessor-lessee type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two per cent or
more of the block of voting shares.
[Institutional directors on the boards of companies shall be considered as
independent directors whether the institution is an investing institution or a
lending institution.]
12
13. LISTED COMPANIES
• Government plays a significant role in Indian corporate structure, though
government companies constitute only 0.3% of the number of companies, these
account for 39% of paid-up capital
• There are 10,000 listed companies listed on BSE and NSE, the market capitalization
of former being $236 billion, making it the 7th largest exchange in Asia Pacific
• Private sector listed companies account for almost 80% of BSE’s market cap; the
remaining
• 20% is made up of listed government companies
• The top 10% of private sector companies (450 firms) account for over 96% of private
sector’s market cap
• Freely tradable shares account for roughly 30% of the equity of listed companies
Statistics Omkar Goswami, India The tide rises gradually
13
15. DEBT AND EQUITY
• Poor bankruptcy laws
• Poor protection of creditors’ rights
• Poor bankruptcy reorganization laws and procedures
Bankruptcy reorganisation of large industrial companies is governed by
Sick Industrial Companies (Special Provisions) Act, 1985 or SICA, and the
process is directed and supervised by the Board for Financial and Industrial
Reconstruction (BIFR)
15
16. BANKRUPTCY
Five fundamental flaws of poorly designed and inadequately implemented bankruptcy
procedures are associated with the SICA-BIFR process, namely:
• Late detection
• Cumbersome and time consuming procedures
• Indefinite stay on all claims of creditors
• Debtor in possession
• Violation of the absolute priority rule
16
17. EQUITY DRIVEN TAKEOVERS
• The SEBI has significantly reformed the equity side of the market for
corporate control.
• Until the introduction of the Takeover Code in 1997, companies could
negotiate takeover deals that frequently left minority shareholders in the
lurch
• The code now regulates various aspects of share purchases
17
18. DISCLOSURES
• The Disclosure standards in India are abysmal
• Indian accounting standard do not follow the principles of consolidation
• The penalty and punishment in the Companies Act is a meagre $50 or 6months
imprisonment or both
• In reality there has been no imprisonment till date over disclosure
18
19. INSIDER TRADING
Though SEBI clearly defines Insider Trading, it has been difficult to detect due
to -
• Existence of middlemen and brokers
• SEBI lacking judicial power
19
20. THE GRADUAL RISE
• Aggressive companies in recent years have made their way to the top rejecting the old
and traditional companies existing in India
• Companies like Infosys have led the way in corporate governance standards through
swift and structures accounting and disclosure standards
• There has been phenomenal growth in the market capitalization
• The Indian financial press is very strong and growing stronger with years
• India shall move towards full account convertibility in a few years
20