Corporate Governance in India: Disciplining the Dominant Shareholder
Corporate Governance in India: Disciplining the Dominant Shareholder
Abstract 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
Abstract 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
References: Bajaj, R., Chairman, (1997) Draft code on corporate governance, Confederation of Indian Industry. Balasubramaniam, N. (1997) “Towards Excellence in Board Performance”, The IIMB Management Review, January-March, 67-84. Barua, S. K. and Varma, J. R. (1993a), “FERA in Reverse Gear; MNCs Strike Gold”, Economic Times, November 12, 1993. Barua, S. K. and Varma, J. R. (1993b), “MNCs Must be Subjected to SEBI Acquisition Code”, Economic Times, November 17, 1993. Cadbury, A., Chairman, (1992), Report on the Financial Aspects of Corporate Governance. King, M. E., Chairman, (1997), Report on Insider Trading Pound J. (1993) in “The fight for good governance”, Harvard Business Review, JanuaryFebruary, 76-83. Pozen, R. C. (1994) “Institutional investors: reluctant activists”, Harvard Business Review, January-February, 140-149. Salmon, W. J. (1993), “Crisis prevention: how to gear up your board”, Harvard Business Review, January-February, 68-75. Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, Modern Library Edition, New York, Random House, 1937, 1965. 15 ©IIMB Management Review (http://www.iimb.ernet.in/review). All rights reserved. Vittal, N. (1997), “Boards and Directors in Public Sector Enterprises”, The IIMB Management Review, January-March, 48-56. 16