Corporate Governance in India

Authors

  • Rajesh Chakrabarti,

    1. Assistant Professor of Finance at the Indian School of Business in Hyderabad.
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  • William Megginson,

    1. Rainbolt Chair of Finance at the University of Oklahoma Michael Price College of Business and the Fulbright-Tocqueville Distinguished Chair in American Studies 2007–2008 at the University of Paris Dauphine.
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  • Pradeep K. Yadav

    1. W. Ross Johnston Chair of Finance at the University of Oklahoma's Michael Price College of Business, Visiting Professor at Lancaster University in England, CFR Research Fellow at University of Cologne in Germany, and a member of the CAF Board of Advisors at the Indian School of Business.
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Rajesh Chakrabarti
AC-8 Level-1
Indian School of Business
Gachibowli
Hyderabad – 500 032
INDIA

Abstract

The Indian corporate governance system has both supported and held back India's ascent to the top ranks of the world's economies. While on paper the country's legal system provides some of the best investor protection in the world, enforcement is a major problem, with overburdened courts and significant corruption. Ownership remains concentrated and family business groups continue to be the dominant business model, with significant pyramiding and evidence of tunneling activity that transfers cash flow and value from minority to controlling shareholders.

But for all its shortcomings, Indian corporate governance has taken major steps toward becoming a system capable of inspiring confidence among institutional and, increasingly, foreign investors. The Securities and Exchanges Board of India (SEBI), which was established as part of the comprehensive economic reforms launched in 1991, has made considerable progress in becoming a rigorous regulatory regime that helps ensure transparency and fair practice. And the National Stock Exchange of India, also established as part of the reforms, now functions with enough efficiency and transparency to be generating the third-largest number of trades in the world, just behind the NASDAQ and NYSE.

Among more recent changes, the enactment of Sarbanes—Oxley type measures in 2004—which includes protections for minority shareholders in family- or “promoter”-led businesses—has contributed to recent increases in institutional and foreign stock ownership. And while family- and government-controlled business groups continue to be the rule, India has also seen the rise of successful companies like Infosys that are free of the influence of a dominant family or group and have made the individual shareholder their central governance focus.

Ancillary