Corporate Governance: India and China

Compared
While a fairly extensive body of literature that compares India
and China has developed in the economics and business spheres,
comparative analyses of the legal regime in these two countries
is somewhat nascent. In that regard, a new book China, India and
the International Economic Order, edited by Professors M.
Sornarajah and Wang Jiangyu at the Faculty of Law, National
University of Singapore (NUS) represents an important
contribution to the legal comparison of economic, business and
trade matters relating to the two emerging giants. The abstract of
the book is as follows:

With contributions by a variety of internationally distinguished

scholars on international law, world trade, business law and
development, this unique examination of the roles of China and
India in the new world economy adopts the perspectives of
international economic law and comparative law. The two
countries are compared with respect to issues concerning trade
and development, the World Trade Organization, international
dispute settlement, regional/free trade agreements, outsourcing,
international investment, foreign investment, corporate
governance, competition law and policy, and law and
development in general. The findings demonstrate that, though
their domestic approaches to economic issues diverge, China and
India adopt similar stances at the international level on many
major issues, recapturing images which existed during the
immediate post-colonial era. Cooperation between China and
India could provide leadership in the struggle for economic
development in developing countries.
Of immediate relevance to the theme of this Blog is a
chapter The Development of Modern Corporate Governance in
China and India authored by Professors Nicholas C.
Howson and Vikramaditya Khanna at the University of
Michigan Law School, the abstract of which is as follows:
This chapter examines the development of corporate governance
in the world’s two biggest and fastest growing emerging markets
- China and India. Although both countries are different in
important ways, they also share significant similarities such as
rapid economic development, significant foreign investment,
economic, structural and legal reform, and a shared interest in (if
not implementation of) essentially Anglo-American corporate
law norms. These differences and similarities provide an
interesting and rich platform for consideration of popular or
contested corporate governance precepts. In particular, after an
extensive discussion of corporate governance reforms in both
countries and corporatization in China, we examine the impact of
“legal origins” (common law or civil law) as compared to
“politics” on the development of corporate governance and stock
markets in both countries. In addition, we focus on the question
of whether India and China provide supporting or contradicting
evidence for some kind of global convergence in corporate law.
We find that the support for the “legal origins” view is not
strong, but rather the “politics” accounts seem more convincing
as explanations for corporate governance and stock market
development in India and China. Further, while there is a good
deal of evidence of partial formal convergence in corporate law,
we cannot identify the same or expected convergence in
ownership or corporate structure. This creates an odd fit between
corporate and securities law and the corporations they shape and
regulate, suggesting some significant path dependence for these
two important economies.
Corporate governance in India
and the UK: A comparative
analysis
Tuesday, October 12, 2010 | Posted by: Grant Thornton
Categories: India, India Watch Issue 10 |
Tags: business, investment, India, M&A, governance, risk, FRC, bribery,Stewardship
Code, anti-corruption

Corporate scandals involving companies like the Maxwell Group, Enron,

WorldCom and the recent banking crisis have influenced the corporate
governance norms in the United States, the UK and India. The Satyam
computers scandal highlighted deficiencies in the Indian corporate
governance regime and its implementation. This article examines the key
differences between the corporate governance regimes in the UK and India
and highlights the corporate governance issues relevant for Indian companies
on the growth path.
Corporate Governance regime in the UK
As a result of the banking crisis, a review of the corporate governance regime
in the UK was carried out by the Financial Reporting Council (FRC). The
review resulted in two principal changes to the regime.
Following a review of the Combined Code on Corporate Governance, the
FRC issued a new edition of the Code- the “UK Corporate Governance
Code”. The UK Corporate Governance Code applies for accounting periods
beginning on or after 29 June 2010 and is the key source of corporate
governance recommendations for companies with a premium listing of equity
shares in UK (regardless of the country of their incorporation) and is kept
under review by the FRC. Certain parts of the UK Corporate Governance
Code apply only to FTSE 350 companies.
The Combined Code on Corporate Governance continues to apply to quoted
companies for accounting periods prior to 29 June 2010.
In addition, the Companies Act 2006 sets out certain principles of corporate
governance, and is supplemented by the Listing Rules, Prospectus Rules and
the Disclosure and Transparency Rules. The Listing Rules require that
companies to whom these codes apply must either comply with the relevant
code or explain the reasons for non-compliance in their annual reports. The
UK Corporate Governance Code encourages chairmen of the board to report
personally in their annual statements on compliance with certain aspects of
the Code.
The second change is the introduction of the UK Stewardship Code. The UK
Stewardship Code is borne out of the Walker review and aims to enhance the
quality of engagement between institutional investors and investee companies
by setting out good practice on engagement of institutional shareholders with
investee companies. Like companies, under the UK Stewardship Code,
institutional shareholders are being asked to adopt a ‘comply or explain’
approach, by publishing details of their compliance with the code on their
websites.

Bribery and anti-corruption is an important facet of corporate conduct. The

recently enacted Bribery Act, 2010 (due to come into force in April 2011)
could have a significant impact on the conduct of business of UK based
companies and companies which carry on business in the UK.
Corporate Governance regime in India
The listing agreement between quoted companies and Indian stock
exchanges is the principal source of corporate governance norms. The
securities market regulator, Securities and Exchange Board of India (SEBI)
prescribes and implements the norms. SEBI has made numerous changes to
the corporate governance regime over the years, to align the same with
market realities.
The case of Satyam Computers where the promoters falsified Satyam’s
accounts, despite the company being listed on the Indian and New York stock
exchange has re-ignited the corporate governance debate in India. As an
aftermath of Satyam, the Ministry of Corporate Affairs published voluntary
corporate governance guidelines in December 2009. These guidelines are
designed to encourage companies to adopt better practices in the running of
boards and board committees, the appointment and rotation of external
auditors and seek to create a whistle-blowing mechanism.
The Companies Bill, 2009, which proposes to amend the Indian Companies
Act, 1956 deals with several aspects of corporate governance such as
director’s duties and related party transactions.
The Prevention of Corruption Act, 1988 principally deals with corruption by
public officers, but prosecution under this Act has been impeded by
requirements for the Government to grant approval for prosecution under the
Act.
Comparison between the regimes in the UK and India
We have set out below a high-level comparison of the principal corporate
governance issues in India and the UK.

Issue UK India
- Currently rely on common law duties.
- Codification of director’s duties is
Director’s duties Codified by the Companies Act, 2006 proposed by the Companies Bill, 2009,
though extent of proposed codification is not
as extensive as in the UK.

- There is no distinction between large and

- Half of the board of larger quoted companies
small quoted companies. Half of the board
must comprise of independent non-executive
of all quoted companies must comprise of
directors. Smaller quoted companies (below
non- executive directors.
FTSE 350) must have at least two independent
- If the chairman of the board is an
non-executive directors.
independent director, 1/3rd of the non-
- Same individual must not be the chairman
executive directors must be independent and
and chief executive.
if the chairman is not independent, half of
- Requires formal, rigorous annual evaluation
the non-executive directors must be
Board of board performance, performance of
composition independent.
committees and directors.
- Same individual can act as chairman and
- The search for board candidates should be
chief executive.
conducted and appointments made, on merit,
- No requirement for a board evaluation
against objective criteria and with due regard
process.
for the benefits of diversity on the board,
- There is no requirement for annual re-
including gender.
election of all directors. Appointment and
- All directors of FTSE 350 companies must
election of directors is governed by the
be annually elected by the shareholders.
Companies Act, 1956.

- Nomination committee leads the process for

board appointments and makes
- Nomination committee is not mandatory,
Nomination recommendations to the board. though some companies have voluntarily set up a
committee - Must consist of a majority of independent nomination committee.
non-executive directors.

Audit committee - Quoted companies must have an audit
committee comprising of 3 members. Audit
committees of smaller quoted companies need
only have 2 members.
- All members of the audit committee must be
independent non-executive directors.
- There is no distinction between small and
large quoted companies. All quoted
companies must have an audit committee
comprising of 3 members.
- Unquoted public companies with a paid up
capital of more than Rs. 50,000,000 must
also have an audit committee.
- 2/3rd of the audit committee must
 comprise of independent directors.

- Quoted companies must have a remuneration

committee comprising of 3 members (2
members for below FTSE 350 companies) and
- Remuneration of directors of public
all members must be independent.
companies (listed or unlisted), within
- Chairman must be an independent, non-
specified limits, must be approved by a
executive director.
remuneration committee if the company has
Remuneration - The committee should have delegated
committee no or inadequate profits.
responsibility of setting remuneration for all
- Committee must consist of at least 3 non-
executives, the chairman, and recommending
executive independent directors including
level of remuneration for senior management.
nominee directors.
- The Code discourages all forms of
performance-related remuneration for non-
executive directors, not only share options.

Key observations
Corporate governance issues are not unique in the Indian context, but as
Indian companies acquire or establish operations outside India or access the
international financial markets, corporate governance issues are becoming
increasingly relevant for Indian companies. Even domestic Indian companies
need to focus on corporate governance, to gain confidence of capital market
investors or while engaging in commercial transactions with multinational
companies.
Legislations such as the Sarbanes Oxley Act, 2002, the Foreign Corrupt
Practices Act, 1977 in the United States and the recent Bribery Act, 2010 in
the UK, have extra-territorial application. As Indian companies become global
in their approach and operations they must be sensitive to the global
consequences of their conduct that may fall foul of anti-corruption.
Companies need to consider the corporate governance norms that apply to
them in different jurisdictions and adopt a standard that can meet the differing
requirements of each jurisdiction, even if that means voluntarily adopting
higher standards in certain jurisdictions. Failure to adequately comply with
the applicable norms can have enormous cost, time and reputational
consequences.
Further, a vigilant approach to corporate governance is warranted as bribery
and corruption issues are an area of investigation in the due diligence process
relating to M&A transactions, joint ventures or other commercial contracts and
representations and warranties are sought in contractual documents on
compliance with legislations like the FCPA and Sarbanes Oxley Act. As the
Bribery Act comes into force from April 2011, similar approaches for
compliance with the Act are expected to the adopted.
Within India we can expect that corporate governance norms will evolve with
the growth in Indian financial markets, increase in public shareholding (recent
amendments require public float of traded Indian companies to increase to
25% of a company’s capital) and as institutional shareholders take a proactive
role in their dealings with investee companies. The voluntary corporate
governance guidelines issued by the Ministry of Corporate Affairs and SEBI’s
recent instructions to asset management companies and mutual funds
requiring them to make disclosures concerning exercise of their voting rights
in investee companies are relevant examples.
Indian corporate governance norms have come a long way since the pre-
liberalisation era of the Indian economy. While the development of these
norms is an evolutionary process, expansion by Indian companies outside
India can provide impetus for implementation of norms that result in good
governance and transparency, ultimately leading to the successful growth of
corporate India.

Abstract:
The increasing trans-national transactions and the changing market dynamics has brought an
urgent need for research andcomparisons of the corporategovernance mechanism
of India and that of the European countries, esp. of United
Kingdom. Corporate governance basically denotes rule of law, transparency,
accountability and protection of public interest in the management of a company’s affairs
inthe prevailing global, competitive and digital environ. The stand of Enron Corporation, Satyam
and others has questioned the efficiency of corporate governance in the developed as well as
developing countries. In our paper a humble endeavor has been made to articulate and put side
by side the standards of corporate governance in both India and United Kingdom. Our research
paper is divided into three parts viz. the corporate governance on an extensive fabric, the role of
board of directors and the last but not the least, the role of
shareholders in the corporate governance. We have dealt with the shareholder,
part in India andUK. To understand the various dynamics involved in the corporate governance,
we have gone through the reports of various committees including the Cadbury Committee of
England, the Sarbanes-Oxley Act (SOX) of 2002 of U.S.A., Tadao
SuzukiCorporate Governance Committee of Japan. The Kumar Mangalam Birla
Committee, the Naresh Chandra Committee, theNarayana Murthy Committee, and the Dr.
Jamshed J. Irani Committee. The essence of corporate governance is the exercise of authority,
direction and control. In this present corporate era, “share ownership” is the superlative
explanation to the exercise of authority. More or less the position in India and UK is relatively
similar, than that of other European countries. The transition from State governed to the market
oriented, globalized, privatized, and liberalized economy, brought the issue
of corporategovernance to the fore. Sensitized and efficient corporate governance ensures less
option for promoters like Mr. Ramalinga Raju to play with people in particular and State as a
whole. It’s the high time for India and UK to relook the loopholes of corporarte governance of their
country and ensure welfare for the people at large.