India: The Relevance of Corporate Governance in the National Economy - Indian Experience

Last Updated: 4 January 2005

By R S Nambi


Corporate governance has reached centre-stage in the global agenda. The principles and codes evolved in several countries have furthered the cause of efficiency, transparency and equity particularly in the interest of the shareholders. Sustainable shareholder value has become the mantra for corporate immortality translating eventually into welfare of the society. Corporate governance can be defined as the way the management of a firm is influenced by many stakeholders, including owners / shareholders, creditors, managers, employees, suppliers, customers, local residents and the government. Different economies have systems of corporate governance that differ in the relative strength of influence exercised by the stakeholders and how they influence the management.

Business Scenario

Looking at conventional firms, management will usually have an informational advantage over other stakeholders and hence the need for corporate governance. Good corporate governance means governing the corporation in such a way that the interests of the shareholders are protected whilst ensuring that the other stakeholders’ requirements are fulfilled as far as possible. For example, it means that the directors will ensure that the company obeys the law of the land while still remaining in business. The Board’s power is still based more on personal politics than good governance.

Availability of Right Information

Corporate governance is all about governing (running or managing) corporations (incorporated businesses). By their nature large incorporated businesses are usually owned by one group of people (the owners or shareholders) whilst being run by another group of people (the management or the directors). This separation of ownership from management creates an issue of trust. The management has to be trusted to run the company in the interest of the shareholders and other stakeholders. If information was available to all stakeholders in the same form at the same time, corporate governance would not be an issue at all. Armed with the same information as managers, shareholders and creditors would not worry about the former wasting their money on useless projects; suppliers would not worry about the customer not fulfilling its part of a supply agreement; and customers would not worry about a supplier firm not delivering the goods / services agreed. In the real world of imperfect information, each agent will use whatever informational advantage they may have.

The OECD Principles

The OECD Principles of Corporate Governance cover five aspects:

  • The rights of shareholders
  • The equitable treatment of shareholders
  • The role of stakeholders
  • Disclosure and transparency
  • The responsibility of the board

These principles can be used by a nation state to design its own corporate governance rules. Auditors may use them to assess the adequacy of any corporate governance regime in the absence of more immediate standards.

Framework for corporate governance

The debate and effort in the arena of corporate governance has been tilted mostly in favour of the publicly listed and widely held companies. The shifting of control when a company’s ownership gets dispersed underscores the need to create and activate structures and processes by which the owners can ensure appropriate governance and management. The second factor addressed the need for more efficient regulation through amendments to listing agreements and company laws as well as updated standards of accounting, reporting and disclosures. The third factor focussed on market efficiency as an ultimate solution to corporate conduct and performance.

The codes and principles derived from this experience appear to be influencing the developing countries in terms of sensitisation to the need for good governance where capital markets are expanding briskly. In the process, however, major business/commercial segments of the economies in the developing world are not covered by the corporate governance regulatory net or have found the principles less rewarding in practice.

The framework for the principles of corporate governance has emanated from such a "world-view" and with the objective of creating efficient and transparent markets with widely held private ownership. Understandably, codes and principles in different countries have tended to believe that all enterprises will be of one variety only despite the caution that "one size doesn’t fit all". Thus, public enterprises have been treated in the same manner as the private either with the assumption that what is good for one is good for the other, or on the premise that eventually all enterprises should be free of dominant ownership of the government. The role of Governments as market regulator has been widely accepted and competition laws are emerging for protecting the people.

Indian Experience

A recent example is the resignation of three Global Trust Bank (GTB) directors, including the head of its audit committee. For instance in its heavily qualified audit report, the auditors have pointed to the accounts being prepared on a going-concern basis, despite a substantial erosion of net worth, based on the bank’s future capital infusion plans. The reappointment of Auditors was an issue and the apex bank has opted for change even ahead of the AGM. In tough situations, Indian independent directors only resign; that too, citing illness or personal reasons as their excuse, but never a difference of opinion with management.

The Standing Conference of Public Enterprises (SCOPE), New Delhi, had recognised the need to examine the corporate governance issues relevant to the public sector undertakings in India i.e. those companies in which central government has equity of 51 % and above. It was recognised that the codes, which were referred to (Cadbury's and the Confederation of Indian Industry’s at that time), were most appropriate to the private sector and that the infirmities in the public enterprise governance needed a devoted attention. The report, derived from the perspectives of several industry leaders and academicians, highlighted a multitude of issues and recommendations to improve the quality of corporate governance. In any developing world, the returns from good corporate governance in State Owned Enterprises should exceed those in the private fold. Obviously, there is a strong interface between good governance and corporate governance in the context of public enterprises as the latter are often used and perceived as instruments of public policy.

Developing an approach and the first principles for improving good corporate governance in India:

Unfortunately, the corporate governance issues are not entrepreneur driven but are imposed on them by the markets. As regards the Public sector undertakings, some initiatives were made. The term "Public Enterprise" here has the broad international meaning covering various types of state owned/controlled enterprise. The principles, if accepted, will obviously imply several operational difficulties, pulls, pressures and dilemmas. However, the attempt is to identify and gain consensus on the pillars for good corporate governance without being daunted by the potential controversies or operational barriers. These would reflect and reinforce the long-term vision of active, transparent, accountable and efficient markets.

Ownership and corporate governance:

There has been a universal belief that the government must restructure its activities and create market-related incentives and discipline for the enterprises in its control. Thus, corporatisation of state undertakings and privatisation has emerged as the most important methods of improving the efficiency of both the State and the corporate entities. Further, international bodies have been advising / pressurising governments to gradually eliminate subsidies, remove administered price mechanisms and reduce such other controls/support which contribute to false/artificial pricing and costs. The alternative, it is asserted, would perpetuate the moral hazard for the government, inefficiency in operations and management and the weak monitoring system. There is increasing convergence of thinking world wide that:

  • Commercial activities should not be undertaken by the Sovereign
  • There should be a clear set of commercial/financially sustainable objectives without cluttering with social objectives; and
  • Market related incentives and discipline including the market for corporate control would be necessary for sustainable economic management and development.

Market Responsiveness:

The assumption of free markets with widely held private enterprises could be insufficient at present for four reasons:

  • During the process of economic reform, several government departments will need to be corporatised without losing control, at least in the initial years. This process will be a continuous one as a State may declare one of its activities as detachable enough from the sovereign function to merit corporatisation.
  • The second reason arises from the possibility of a transitional control by the government until a new set of active owners emerges. Such control by the government may be as a fall back option in case of inefficient new owners or because the capital markets have not become mature enough to generate active shareholder monitoring that would make a positive impact on managerial efficiency. The "golden share" approach adopted in some countries as an interim mechanism signifies the existence of a transitory position for the company before the ideal market conditions emerge. The goals of privatisation would be attained only when sound corporate governance structures and processes are established and sustained. In the absence of a better governance system and process, including more active and vigilant shareholders, the goals of privatisation would not be met. Thus, the government may have to continue a direct control or indirect monitoring of those companies which are in the process of privatization till conditions emerge requiring complete withdrawal.
  • Thirdly the privatization process resulted in transferring the property rights to parties, which are less efficient and/or less honest than the government’s previous "agents". Such new owners may have failed in meeting the long-term goals of divestment/dis-investment/sale and may have created conditions that force governments to re-nationalise or take control.
  • Fourthly, there could be a realignment of equity structure over a period of time in joint ventures between public and private enterprises whereby the public enterprise gains control over the management. Such a change in capital structure may be rare and not a prospect that government prefers. Similarly, a public enterprise may acquire a private firm or another public enterprise or a government-controlled co-operative.

The governments' control system reflects, inter- alia, the inherent conflict of roles of the State – as a regulator, owner, adjudicator and executive - and divergence in applying the principles of corporate governance among different entities and at different levels of ownership. The multiplicity and ambiguity of roles has helped the State in using public enterprises as agents of political interest than public policy. Subsidy to consumers or targeted sections at the cost of the public enterprise, as also special grants and bail-out packages, have offered reasons, even if misplaced, for continued special controls and rights.

The infirmities in governance architecture in the case of public enterprises appear to arise mainly from:

  • The current powers to create, develop, renew and restructure the governing board and its members and their variance with the typical widely held public corporation.
  • The powers specially created or exercised by the government, which are not in consonance with the transparency ideal and other generally accepted principles of good corporate governance.
  • The lack of logic for continuation of these powers in the interest of independence in the governing board, its integrity, accountability and transparency.

A close examination reveals that the government has a massive task before it to create the enabling conditions that would improve the quality of corporate governance across the public enterprise system and in its transition to becoming market oriented.

Good Corporate Governance - Road Ahead:

Good corporate governance in public enterprises implies attention to issues larger than those of law and stock exchanges. They need to address the principles of government and public enterprise relationship and create the fundamental pillars based on which the governing board can become effective. The principles, codes and best practices for boards will become far more attractive and effective once these fundamentals are agreed upon and instituted.

  • The Government should review the legal status of all organisations controlled by it so as to separate those which can carry out commercial activities as companies following the market discipline and those that will continue as a sovereign function of the government.
  • The government should draw up a consensus based comprehensive policy of privatization, of both companies and other entities, delineating those, which will continue to be State-owned, the method of disengagement and the process of disengagement.
  • The government should bring about greater transparency by fully accounting for subsidies and price controls imposed on public enterprises, and achieving the desired social and development objectives through governments` budgetary provisions and related mechanisms.
  • The government should give up direct control over public enterprises by restructuring/rationalising the role of departments overseeing these undertakings.
  • The government must separate its ownership role and let public corporations be governed by the same structure of controls as that of any other company. The laws giving special status to public enterprises or special controls over them must be amended / annulled.
  • Parliamentary/Legislative Assembly control over public enterprises should be limited to interaction with the body exercising the ownership rights of the Government.
  • The government should assess and re-capitalise the public enterprises to ensure that the cost of social burden on a historical basis is made good on a one-time basis after adjustment for special grants and concessions given, if any.
  • Ownership rights of the Government should be exercised by specialised bodies to be created for that purpose.
  • The body exercising the voting rights should actively structure, create, develop and renew the governing board ensuring highest qualities of leadership, enterprise, integrity and judgement.
  • Governments must ensure that persons who are or were members of parliament or legislative assemblies be excluded from occupying positions of chairman or members of the governing board of a public enterprise, thus extending the spirit followed in the case of central public undertakings.
  • The position profile and specifications of chairman, chief executive and members of the governing boards should be approved by the governing board and shareholders in advance and through the expert advice of external bodies.
  • Listed public enterprises will have to follow the mandatory requirements of the Company Law and the stock exchange regulations. All other public enterprises should follow the relevant CACG or OECD principles that would foster independence, integrity, transparency and accountability, of the governing board, protect the rights of shareholders and engage the stakeholders.
  • Each public enterprise should develop a best practice manual for board processes, procedures and formats which may include, inter-alia, the profile of board positions; recruitment, selection, induction, training processes; conduct of board meetings; dealing with conflict of interests, disclosures, accounting and reporting requirements; evaluating board members; remuneration and renomination.
  • Public enterprises should ensure that individuals chosen for appointment as directors are either properly accredited, when such facility is available, or be formally trained in corporate governance practice.


Though noteworthy progress has been achieved, clarity at policy making levels are needed to sustain the progress and to gather further momentum. The education and capacity building of regulatory structures would also help. The road is still far ahead to catch up with West.

The author is a consultant on the panel of World Bank and partner with M/s. RSN & Associates, Chartered Accountants, Chennai,. The firm is on the panel of World Bank Group and ADB.

© Copyrights reserved by RSN & Associates, Chartered Accountants, Chennai, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions