Evolution of Corporate Governance in Emerging Economies – Indian Experience

Abstract

Evolution of corporate governance in India from 1850 to 2020 provides significant insights into how discontinuities in the corporate Eco system impacts corporate governance practices. Although the concept of corporate governance and monitoring board emerged in 1972 in USA and spread across the globe in 1990s, after the Cadbury Committee in UK submitted its report, the issues on the governance of joint stock companies bothered regulators and academicians, and of course, minority shareholders, much before the emergence of the term corporate governance. India saw three significant structural discontinuities from 1850 to 2020. The period 1850 to 1947 was the colonial era when Indian business groups were emerging. The managing agency system emerged during that period as an institution to address the twin challenges of capital scarcity and scarcity of managerial skills. This facilitated industrialisation and also increased concentration of ownership. 1947 to 1991 was the period when the Indian government adopted the command economy framework and implemented the same through five-year plans and the licensing system. Public sector enterprises emerged as the dominating force in the Indian economy, although private sector was allowed to operate in those sectors which were not reserved for the state sector. Obtaining a license to start a new industry or expand the existing capacity was the key to the success of a business enterprise. Managing agency system continued until 1970. Some business groups consolidated their position because they could stand at the front of the queue for obtaining the licences. In the closed economy, they operated in the sellers' market. Licensing system and closed market resulted in unrelated diversification. The change in the social structure also resulted in division in business group due to the weakening of the joint family norms. Moreover, public sector development financial institutions (DFIs) acted on the behest of political bosses, often supporting the management resulting in weak corporate governance. In 1991, the Indian government opened the India economy and the country ushered into the era of market economy. Licensing system was dismantled. During the period between 1990 and 2020, the capital market developed, New entrepreneurs entered the corporate sector. Mutual fund industry achieved high growth. FDI and FPI increased very significantly, and start-ups emerged and grew. In the year 2000, for the first time, Security and Exchange Board of India (SEBI), the capital market regulator, introduced the Code of corporate governance. Indian business survived in the competitive market. The Indian corporate governance code revised number of times in the past two decade bench-marking with global best corporate governance practices. However, Indian corporate sector being dominated by the family business, the question 'how independent are independent directors' remains. With significant increase in the shareholding of FDI and FPI in top 200 companies, the average standard of corporate governance is improving. This essay examines the evolution of corporate governance and how discontinuities impacted the evolution process. It also predicts how and why the Indian corporate governance practices are expected to improve in coming days based on the emerging trends.