Does India Need a Unique Corporate Governance Code? by Asish K Bhattacharyya

By Asish K Bhattacharyya


The Indian corporate governance code is based on the Anglo-Saxon model. Some experts believe that India needs to develop its own corporate governance code because business groups – business families and the government –dominate the Indian corporate sector unlike the corporate sectors in the USA and UK, where concentration of shareholding is less prominent and shares are widely held by geographically dispersed investors. They also argue that culture is one of the important factors that influence the corporate governance system and the Indian culture differs from that of those countries where the Anglo-Saxon model is working effectively. In fact, the debate on whether the convergence of corporate governance model will deepen further or greater differences in corporate governance practices in different countries will emerge is gaining momentum.This question arises in the backdrop of the trend towards convergence of corporate governance code (mechanism) across the globe towards the Anglo-Saxon model.

There are many forces that are driving convergence of corporate governance models in different countries. For example, the model codes published by international bodies, such as the World Bank, the Commonwealth of Nations, and OECD and the corporate governance policies and practices of major corporations operating around the world, are driving convergence.The International Organisation of Securities Commissions (IOSCO) encourages convergence. Similarly, adoption of the International Financial Reporting Standards (IFRS) by different countries and the need for countries to attract foreign capital have pushed the movement towards the convergence of corporate governance models.

In spite of the visible trend towards convergence, differences in corporate governance models exist. For example, the dual board system still exists in continental European countries and the corporate governance mechanism in Japan significantly differs from the Anglo-Saxon model.

However, the influence of the market has definitely diluted the corporate governance structures that have prevailed for a very long period.

Over the past two decades fundamental corporate governance principles have been established. Those principles are separation of management from governance, transparency, accountability, strategic risk management, corporate responsibility to contribute towards the sustainability of the natural environment and corporate responsibility towards stakeholders.

These fundamental principles cannot be ignored while developing a corporate governance structure. If, India has to develop its own corporate governance model it should be based on these fundamental principles. Therefore, it will be a great challenge to develop an alternative model which will be substantively different from the existing model.

Does India really need to develop a model significantly different from the Anglo-Saxon model? Post-liberalisation, India has adopted the market model, framed policies and regulations for the development of the capital market and liberalized foreign investment in Indian companies.

This has led to increasing public investment, directly and through institutional investors, in the equity capital of companies. As a result, the question of protecting non-controlling shareholders gained prominence and the need for developing and implementing a corporate governance model was felt. Initially, the primary aim of the corporate governance mechanism was to protect the interest of non-controlling shareholders.

Now, the focus is equally on the monitory shareholder’s interest, enterprise performance and corporate social responsibility. Globally, the focus is on these three dimensions of corporate governance. If, the issues are the same, the Anglo-Saxon model should work well In India, irrespective of the ownership structure. Therefore, there might not be any need for developing a unique corporate governance model for India.

Ownership structure affects the implementation of the code. Concentrated ownership has certain positive and certain negative influences on corporate governance. Tunneling is one of the negative influences. Researches have established tunneling of resources from a group company in which the promoter group has low cash flow right to a company in which it has high cash flow right.

This happens more in business groups that have a pyramid structure, which allows the parent at the apex of the structure to control the company at the bottom with a very low percentage of voting rights. In practice, independent directors are appointed by the incumbent management and therefore, it is likely that they will be loyal to the business family.

Therefore, they may not stop tunneling through inter-corporate loan, related party transactions and other means. Tunneling can be reduced by prohibiting the pyramid structure and by strengthening other institutions like Serous Fraud Investigation Office (SFIO).

India is weak in the implementation of rules and regulations. Endeavour on the part of the government to improve the same is discernible.

However, there is a need to speed up the process of implementation by strengthening existing institutions and creating new institutions, if required.

Asish K Bhattacharyya : Professor and Head of the School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs, Manesa. Email: 

(Business Standard, 29 Oct 2012)