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Corporate Governance in India: The Transition from Code to Statute

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Corporate Governance Codes for the 21st Century

Abstract

This chapter explores the evolution and implementation of corporate governance norms in India. While India initially jumped on the bandwagon of countries adopting voluntary codes of corporate governance following the Cadbury Report, the approach towards “soft law” was rather quickly jettisoned in favour of a mandatory approach towards corporate governance. As a result of more recent reforms, corporate governance norms have now become well ensconced almost in their entirety in the primary corporate legislation (a phenomenon this chapter refers to as the “ultra-mandatory” approach), arguably more so than most jurisdictions. As this chapter demonstrates, voluntary codes are ill-equipped to serve their goals in dissimilar jurisdictions, as their success is dependent upon a cocktail of factors that may not be present in all legal systems. 

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Notes

  1. 1.

    Cheffins (1999), p. 6; Hopt (2011), p. 12.

  2. 2.

    The distinctions between voluntary codes (soft law) and mandatory rules (hard law) are discussed in detail in Anand (2006) and du Plessis et al. (2014), pp. 194–205. See also, Keay (2014) and Cuomo et al. (2016).

  3. 3.

    Nestor and Thompson (2001).

  4. 4.

    Jordan (2005), pp. 1010, 1014.

  5. 5.

    Generally, in most jurisdictions while principal companies’ legislation deals with some essential elements of corporate law and governance, the detailed aspects of corporate governance such as board composition, roles and responsibilities of directors, board committees, audit, disclosure and transparency norms and the like are left to either corporate governance codes or to listing rules issued by the stock exchanges. However, in the case of the ‘ultra-mandatory approach’ (an expression coined for the purposes of this chapter), the detailed elements of corporate governance are contained in the primary corporate legislation itself rather than in subordinate legislation, corporate governance codes or stock exchange rules.

  6. 6.

    See Black and Kraakman (1996), p. 1932, in the context of Russia.

  7. 7.

    Chakrabarti et al. (2008), p. 63.

  8. 8.

    Confederation of Indian Industry (1998a, b).

  9. 9.

    Varottil (2009), pp. 9–12.

  10. 10.

    Securities and Exchange Board of India (2000a).

  11. 11.

    Securities and Exchange Board of India (2000b).

  12. 12.

    These corporate governance norms were progressively enhanced through amendments to Clause 49, which also contained some non-mandatory aspects. Black and Khanna (2007) conducted an event study and found that Clause 49 was received positively by the investors.

  13. 13.

    Afsharipour (2010), p. 58.

  14. 14.

    This was achieved by introducing s 23E to the Securities Contracts (Regulation) Act, 1956.

  15. 15.

    Dharmapala and Khanna (2012).

  16. 16.

    Irani (2005).

  17. 17.

    Varottil (2015), p. 38. The Satyam scandal has often been referred as ‘India’s Enron’, although there are significant differences in the modus operandi and impact of both scandals. See Khanna (2009) pp. 188–189.

  18. 18.

    Varottil (2010), p. 3.

  19. 19.

    Ministry of Corporate Affairs (2009a).

  20. 20.

    Ministry of Corporate Affairs (2009b).

  21. 21.

    Ministry of Corporate Affairs (2010).

  22. 22.

    Ministry of Corporate Affairs (2012).

  23. 23.

    Anand (2006).

  24. 24.

    Reputation tends to be a powerful tool against misbehaviour, especially in the case of repeat players in the market. Armour and Skeel (2007), pp. 1771–1772.

  25. 25.

    Black and Coffee (1998).

  26. 26.

    Armour and Skeel (2007), pp. 1767–1768.

  27. 27.

    Burke (2002), p. 357.

  28. 28.

    Steeno (2006), p. 407.

  29. 29.

    Davies (2015), p. 355.

  30. 30.

    See Sect. 3.2 below.

  31. 31.

    Wymeersch (2005), p. 19; Varottil (2010), p. 23.

  32. 32.

    de Jong et al. (2005).

  33. 33.

    Arcot et al. (2010), p. 193.

  34. 34.

    See Black and Kraakman (1996), p. 1929, in the context of Russia.

  35. 35.

    Mirza and Mohanty (2014).

  36. 36.

    Chakrabarti et al. (2008), pp. 59, 62–63.

  37. 37.

    Varottil (2015), pp. 29–31.

  38. 38.

    In fact, over a period of time, rules governing companies and their managements were significantly tightened, often at the cost of enterprise, innovation and the ease of doing business.

  39. 39.

    Goswami (2000), p. 8.

  40. 40.

    Varottil (2012), pp. 602–608.

  41. 41.

    Varottil (2012), pp. 622–627.

  42. 42.

    Varottil (2012), pp. 625–627.

  43. 43.

    That Indian companies are characterised by concentrated shareholdings is beyond doubt, with the average shareholding of controllers being in the range of 48–56% in the last decade under various empirical studies. See for example Balasubramanian and Anand (2013). Controlling shareholders tend to be business families, the state or multinational firms.

  44. 44.

    Ajinkya et al. (2005), p. 346.

  45. 45.

    Arcot et al. (2010), p. 198; Chen et al. (2008), p. 499; Anderson, et al. (2009), p. 205.

  46. 46.

    Arcot and Bruno (2011), p. 2.

  47. 47.

    Dharmapala and Khanna (2012), p. 1081.

  48. 48.

    Banaji and Mody (2001), p. 8.

  49. 49.

    Varottil (2010), p. 26.

  50. 50.

    Varottil (2009), pp. 31–32.

  51. 51.

    Varottil (2012), pp. 613–618.

  52. 52.

    Anand (2006), p. 241; Hopt (2011), p. 66.

  53. 53.

    Armour et al. (2011), p. 229.

  54. 54.

    Armour et al. (2011), p. 229.

  55. 55.

    Irani (2005).

  56. 56.

    Varottil (2015), p. 38.

  57. 57.

    Varottil (2009), pp. 32–33.

  58. 58.

    Varottil (2015), p. 40.

  59. 59.

    The company was finally acquired by Tech Mahindra, another Indian IT company. Afsharipour (2010), p. 48.

  60. 60.

    Varottil (2010), p. 4.

  61. 61.

    Varottil (2010), pp. 27–28.

  62. 62.

    The committee was chaired by Mr. Yashwant Sinha, who was a member of Parliament representing the political party then in opposition.

  63. 63.

    Ministry of Corporate Affairs (2010), para. 14.

  64. 64.

    Ministry of Corporate Affairs (2010), para. 14.

  65. 65.

    The Companies Act, 2013 is replete with several such provisions. It would not be possible to deal with all of those due to paucity of space.

  66. 66.

    See Hopt (2011), p. 17.

  67. 67.

    Romano (2005), Ribstein (2002), Hill (2005). See also, Anderson (2008).

  68. 68.

    Ministry of Corporate Affairs (2010), para. 20.

  69. 69.

    Companies (Amendment) Act, 2015.

  70. 70.

    Ministry of Corporate Affairs (2016).

  71. 71.

    Companies (Amendment) Bill, 2016, Statement of Objects and Reasons, para. 4.

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  1. Faculty of Law, National University of Singapore, 469G Bukit Timah Road, Singapore, 259776, Singapore

    Umakanth Varottil

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  1. Deakin Law School, Deakin University, Geelong, Victoria, Australia

    Jean J. du Plessis

  2. CUHK Business School, Chinese University of Hong Kong, Hong Kong, China

    Chee Keong Low

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Varottil, U. (2017). Corporate Governance in India: The Transition from Code to Statute. In: du Plessis, J., Low, C. (eds) Corporate Governance Codes for the 21st Century. Springer, Cham. https://doi.org/10.1007/978-3-319-51868-8_5

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