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Need of Reforms in Corporate Governance system in India

Anglo-Saxon model is being pursued in The Indian corporate governance mechanism.


connoisseurs believe that India needs to extend 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 focus of shareholding is less famous and shares are widely
held by geologically circulated investors.
This question starts in the milieu of the inclination towards junction of corporate governance 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 theInternational 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? Postliberalisation, 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 shareholders 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.