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From Kautilya to Tata-Mistry spat: Charting the development of corporate governance in India

The genesis of corporate governance in India can be traced back to Kautilya’s Arthshastra. Kautilya, the noted statesman and principal adviser to the Mauryan Emperor Chandragupta Maurya, believed that the happiness of the king depended on the happiness of his people. He propounded that the King and his ministers must follow a strict code of discipline and always act in the best interest of their subjects.

Parallels can be drawn between the structural hierarchy of ancient India and contemporary corporate anthropoid architecture. The Board of Directors must serve the interests of the company as a whole if everyone is to profit. Though corporate governance norms are essential to the proper working of a company, it took the Indian authorities a fair amount of time to bring it to the forefront of their policy agendas.

Cyrus Mistry, ousted Chairman, Tata Sons and Ratan Tata, interim Chairman

Cyrus Mistry, ousted Chairman, Tata Sons and Ratan Tata, interim Chairman

At the time of Independence, India had an operational stock market, an active manufacturing sector and a host of well-developed British-derived corporate practices. From 1947-1991, it pursued decidedly socialist industrial and commercial policies such as nationalizing banks to make the State the primary provider of debt and equity capital for private enterprises.

The Government responded to an impending fiscal crisis in 1991 by passing a series of reforms aimed at general economic liberalization with an emphasis on corporate governance norms. This was catalyzed primarily by the growing need for capital by Indian firms and the formation of SEBI.

The first major initiative to codify corporate governance norms was undertaken by the Confederation of Indian Industry (CII). The CII setup a committee to examine corporate governance issues and prescribe a voluntary code of best practices. Drawing heavily from the Anglo-Saxon model of corporate governance, the CII released a document titled Desirable Corporate Governance: A Code in 1998. The comprehensive code focused mainly on listed companies and was not mandatory.

Though the CII Code met with positive reception, a number of stakeholders expressed a preference for a statutorily backed code for corporate governance. Consequently, Sebi setup a committee under the auspice of Kumar Mangalam Birla to promote and raise the standards of good corporate governance. The Birla Committee placed special emphasis on the role of independent directors in board management. In 2000, the recommendations of the committee were accepted by the SEBI board and incorporated into Clause 49 of the Listing Agreement of the Stock Exchanges.

Clause 49 was reviewed and improved upon by the Narayana Murthy committee, which was setup when Mr. N.R. Narayana Murthy was the chairman of SEBI. The committee took inspiration from the OECD Principles of Corporate Governance, the work of the Cadbury Committee and Sarbanes-Oxley Act (USA).

The incorporation of Clause 49 and its subsequent amendments saw parallel action in a review of the Companies Act, 1956. The Central Government constituted an Expert Committee under the Chairmanship of Dr. J.J. Irani in 2004 to make recommendations for the new Companies Bill.

The Government of India first introduced the new Companies Bill in Parliament in 2008. However, it lapsed and decision was made to re-introduce the Bill in its original form in 2009. Fate intervened in the form of the Satyam scandal in January 2009, forcing regulators to review the extant regulations (including the new Companies Bill) through the prism of the issues unearthed under the Satyam scandal. This led to a thorough revision of the Companies Bill which was introduced in its final form in the Lok Sabha in 2011.

The Bill received its assent and is now known as the Companies Act, 2013. Most of the provisions under this Act were applicable from April 1st, 2014. The new Act introduced significant changes regarding the board composition of a company with a renewed emphasis on management procedures.

Whilst the changes seemed overly prescriptive, a closer analysis led to the compelling conclusion that the emphasis on board processes would institutionalize good corporate governance and not make governance over-dependent on the presence of certain individuals on the board.

The broad intent of the Act was to strengthen corporate governance in India through the introduction of provisions that would facilitate the inception of transparent and accountable corporations with largely autonomous Board of Directors. The reality however is very far off from what legislators envisioned. A recent survey found that many companies do not adhere to the new norms under the Act.

The Tata-Mistry melee is emblematic of core issue facing commercial India when attempting to implement good corporate governance norms. Mistry’s ouster is a corporate governance disaster of such epic proportions, that many top B-Schools in India are using it as a case study for what not to do in such situations. So why is it that India has such a decidedly terrible track record with corporate governance norms?

One writer, Pratip Kar, argues that India has found it difficult to adopt corporate governance best practices because these markedly Anglo-American regulations clash with the national culture. Kar further explains that this sensitive issue of culture is overlooked, if not avoided altogether, when implementing corporate governance best practice, partly because these traditions run deep and, hence, are difficult to address, let alone change. India’s distinctive corporate governance issues originate from the high percentage of companies that are family-owned.

Harvard Business School professors Tarun Khanna and Krishna Palepu have suggested that, “concentrated ownership has been an important feature of India’s private sector for the past seven decades. . . Concentrated ownership exists . . . because of institutional voids, [such as] the absence of specialized intermediaries in capital markets.”

At present, one-third of Indian companies are controlled by one or more family members in concert with one another. Most family owned businesses are unable to discern that there lies a dichotomy between the business and the personal affairs of the family. Thus, decisions are often made to suit the family and not necessarily in the best interest of the firm.

Another issue that exists in current corporate leadership is the rampant resistence to change in working culture that makes it difficult for younger (and often more innovative) executives to influence corporate decision making. Traces of all these issues can be found in the cracks left by the Tata-Mistry fallout. If India Inc is to thrive it will treat the Tata-Mistry disaster as a cautionary tale and learn from its failings.

(The author is the founder of Hammurabi & Solomon and a visiting fellow with the Observer Research Foundation)

Updated Date: Nov 07, 2016 07:39 AM

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