Module-4: Emergence of Corporate Governance in India

 

From the Kautilya of the ancient Mauryan Kingdom to the modern corporate empires, the issues of governance have always engaged the attention of the rulers and other stakeholders. Kautilya believed that the happiness of the King depends on the happiness of the people. He propounded that the King and his ministers must follow a strict code of discipline and always act in the best interest of their subjects. In the present corporate world we know who are the kings, their ministers and the ultimate subjects. What follows from Kautilya’s analogy is that all of them shall follow certain discipline and be guided by the interests of the shareholders.

At the time of Independence, India had an operational market, an active manufacturing sector and a host of well developed British derived corporate practices. From 1947-91, we pursued socialist industrial and commercial policies like banks nationalisation to make the state the primary provider of debt and equity capital for private enterprises. The post 1991 general economic liberalisation marked the beginning of the emphasis on corporate governance norms. This was catalysed primarily by the growing need for the capital by the companies and the formation of SEBI.

The Indian Economy was liberalised in 1991. In order to achieve the full potential of liberalisation and enable the Indian Stock Market to attract huge investments from foreign institutional investors (FIIs), it was necessary to introduce a series of stock market reforms.

India’s distinctive corporate governance issues originate from the high percentage of family owned companies. In our country more than 1/3rd of the companies are controlled by one or more family members in concert with one another. Most family owned businesses are unable to discern that there lies a dichotomy between the business and the personal affairs of the family. Thus, decisions are often made to suit the family and not necessarily in the best interest of the firm.

 

On April 12, 1988, the Securities and Exchange Board of India (SEBI) was established with a dual objective of protecting the rights of small investors and regulating and developing the stock markets in India. In 1992, the ‘BSE’, the leading stock exchange in India, witnessed the first major scam masterminded by Harshad Mehta. Analysts felt that if more powers had been given to SEBI,the scam would not have happened.

As a result, the ‘GOI’ brought in a separate legislation by the name of ‘SEBI Act 1992’and conferred statutory powers to it. Since then, SEBI had introduced several stock market control measures

A general classification of the Corporate Governance in India on a very broad basis is as follows:

The Management – Agency system

1850-1955

The Promoter system

1956-1991

The Anglo-American system

1992 onwards

 

The initial stimulus for corporate governance reforms came after the South-East and East Asian crisis of 1997-98 Government, multilateral institutions, banks and companies recalled that the devil lay in the details - the nitty-gritty of transactions among companies, banks, financial institutions and capital markets; corporate laws, bankruptcy procedures and practices; the structure of ownership and crony capitalism; stock market practices; poor Board of Directors with scan fiduciary responsibility; poor disclosures and transparency; and inadequate accounting auditing standards.

SEBI defined corporate governance as the ‘acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and making a distinction between personal and corporate funds in the management of a company.’

Thoughcorporate governance norms are essential to the proper working of a company, it took us a fair amount of time to bring it to the forefront of the policy agenda. These corporate governance norms kept evolving ever since the Confederation of the Indian industry (CII) first came out with the Desirable Corporate Governance : A Code in 1998. Subsequently, the Birla Committee, the Naresh Chandra Committee, the Narayan Murthy Committee, Dr. J. J. Irani Committee, etc. made several recommendations resulting in the evolution of corporate governance norms as they are today. Incorporation of Clause 49 of the Listing Agreement of the Stock Exchanges by the SEBI based on the recommendations of the Birla Committee is considered a landmark reform in corporate governance. The coming into being of the Companies Act, 2013, is the latest in this process of evolution of corporate governance norms dealing with the relationship among the shareholders, the Board of Directors and the management.

The corporate consciousness about corporate governance got enhanced to responsible business over a period of time through various consultative processes and legal measures . These milestones are discussed in the upcoming sessions in the following order.

1. CIICode of Desirable Corporate Governance (1998)

1.     2   KumarMangalam Birla Committee (1999)

3. Reserve Bank of India (RBI) Report of the Advisory Group onCorporate Governance (2001)

4.  C G Naresh Chandra Committee of2002

5.  Narayana Murthy Committee 2002

6. Dr J J Irani Committee of 2005

4. 7. Guidelines on Corporate Governance for Central Public Sector Undertakings (SOEs) (March 2007)

8.  8. Other important measures


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