Chapter 2: Corporate Governance in India

The industrial growth in India along with the maturity that followed in corporate culture began after independence in 1947, but the expression ‘CG’ remained vague until 1990. Although the problems of CG can be traced back to the origin of the corporate form, it came to the scene after experiencing a number of corporate scandals that mainly occurred in the liberalised Indian economy. In India, the crucial need for CG was first realised with the Harshad Mehta’s scam that was exposed in April 1992. During the period, the characteristics of the country’s governance were believed to be feudalistic. The increasing corruption in the government and its various sectors had kept the management of the business organisations above accountability for their misdeeds. This also encouraged them to indulge in more unethical practices. During the last two decades, along with the developed economy, India experienced a large number of private business organisations showing unrestrained corporate misgovernance. It was clearly indicating the nature and extent of corporate misgovernance that exists in those organisations of India and in its government also. Indian financial system was characterised as, a closed economy, a sheltered market, limited need and access to global business or trade, lack of competitive spirit and an inflexible legal framework. This financial system mainly suffered from the observance of rules and regulations rather than the realisation of broader corporate objectives which shaped the country’s corporate regulatory mechanism. Yet another important factor which acted as a hindrance in sound and transparent CG was the shareholding pattern of the Indian corporate sector. The large proportion of Indian corporation is controlled by the promoter families owning a good proportion of share capital in their companies. By applying their controlling and voting power, these business families drive these companies to fulfil their own interest. In such an unhealthy situation, corporate democracy, the professionalisation of management and transparency of operations were transformed into empty terms. In this circumstance, Indian experienced a number of corporate battle and scandals, especially after economic liberalisation. These scams and corporate hazards were serious enough to shake the beliefs of the shareholders in the functioning of the capital market, the role of institutional investors and ruined the economy of the country.