Why India's Corporate Governance Model May Need Changes

Should India revisit the existing corporate governance model? It should if one were to go by a paper shared with the Confederation of Indian Industry. The paper has suggested a relook at the regulations related to the Corporate Governance Policy.

The existing company law regulations as part of the corporate governance policy are based on Anglo-American models which, according to the paper, do not suit the needs of India.

“The Indian model is not an Indian business culture-centric model. The Indian business culture is largely family-centric,” it said.

The Companies Act, 2013, brought in new concepts into the corporate domain of India. Read in the Indian context, some of these need to be relooked, the paper said.

S Gurumurthy, who wears multiple hats such as corporate lawyer, chartered accountant and editor, is the author of the paper. 

The paper traced the origin of the issue of corporate governance to the Asian financial crisis. In the West, the idea was triggered by the Enron and WorldCom scams and later the 2008 financial meltdown.

“The original issue in corporate governance, which the company laws world over sought to address, was the Principal-Agent relation between the shareholders and board of directors/CEO, which calls for protection for the shareholders' interest, whose monies the directors handle,” the paper said.

However, according to the paper, this is an issue so unique to the business culture of Anglo-Saxon West, where funds, which are the agents of the ultimate investors/shareholders, hold most shares in the most listed companies.

Somewhere along, the shareholder oversight appears to have been lost. The reason, according to the paper, is intervention of funds as intermediaries. This created the issue of double agents. On the one hand, there are funds who have become agents of shareholders. On the other, there are CEOs/directors who have become agents of the funds.

This has thrown up a vital question. Who are the shareholders? The intermediary funds, or the ultimate holders of shares who have put their money into the funds?

Institutional investors—mutual funds, pension funds, insurance companies—have indeed become the chief owners of shares of US corporations. There has been a fundamental change in the ownership of the US public companies over the last few decades.

This has seen equity ownership shifting from dispersed individual owners to concentrated institutional owners, specifically investment intermediaries such as pension funds, mutual funds and bank trust departments. So much so, the institutional investors today own significant majority holding in a public company. Ipso facto, they have an overwhelming presence on the board.

Not surprisingly, agency capitalism—where record holding “agents” hold equity ownership of a large share of the economic base, on behalf of beneficial owners—has come to stay.

The ground situation in India is quite different. Indian companies are invariably promoter-led and promoter-managed. The US companies are, however, promoter-less and CEO-managed. While the promoters have stake in the companies they owned, the CEOs had no stake except remuneration and bonus. The corporate governance norms in the US were conceived to deal with the situation in which there was no stakeholder (read shareholder) control on listed corporates.

“This distance between corporates and shareholders occurred in the last three decades in the US financial system. First, the funds and therefore the fund managers came in between the company and the shareholders. This led to the fund managers and the corporate managers colluding to the prejudice of the shareholders. Next came the index-based trading, which made company scrip even less important. This distanced the shareholders even more. This necessitated the intervention of independent directors,” the paper said.

The alliance between the CEOs and fund managers is the biggest worry of the regulators in the US. So, there is a paradigm difference between India and the US. “Hence, there is a need for a different philosophy and regulatory framework—different from that of the US—for corporate governance in India. The stake-less CEO-centric corporate governance model cannot be integrated into the stake-full promoter-led model that operates in India,” the paper argued.

The philosophy and structure of the corporate governance model in India obviously needs a relook. "One-fit-all" is not the right approach, the paper said. 

KT Jagannathan is a senior financial journalist based in Chennai. He has been in business journalism for over three decades, covering corporate developments and critical industry verticals. He is the co-founder of www.carnaticdarbar.com, a news website for Carnatic music, a niche art form.