The stakeholder approach to corporate law: a historical perspective from India

Abstract

The purpose of this paper is to examine the historical evolution of corporate law in India from the first corporate legislation in 1850 until the present in order to assess the manner in which such legislation has addressed the question of corporate purpose. Such evolution straddles the colonial period until 1947 when Indian companies legislation largely replicated parallel English legislation, and the post-colonial period when Indian corporate law began to deviate from its English origins on several aspects. As this paper demonstrates, early companies legislation in India during the colonial period largely treated a company as a private matter (similar to the nexus of contracts theory) with limited focus (if at all) on non-shareholder constituencies. This was consistent with the role of management in ensuring shareholder value maximization. This can be attributed to England’s own focus in that direction at the time. However, in the years following decolonization in 1947, the purpose of the company began undergoing metamorphosis with greater prominence being given to the public nature of the company and the impact of its actions on society. After a brief oscillation in the approach in the 1990s, recent reforms in corporate law culminating in the enactment of the Companies Act, 2013 have firmly ensconced the company within the framework of the stakeholder theory, and away from a pure shareholder maximization approach advocated by the nexus of contracts theory. The reasons for this sea change in approach are embedded in the political economy of the country, especially in the years following independence.