India did not begin to liberalise its economy until the early 1990s and then only gradually, allowing it to escape the worst of the 1997-98 Asian financial crisis. This gave rise to a unique situation: India is the only country in the region where industry, rather than government, provided the initial impetus for corporate governance reform. Driven by a desire to make Indian business more competitive and respected on the world stage, the Confederation of Indian Industries (CII) published a voluntary Code of Corporate Governance in 1998—one of the first major codes in Asia. The Securities and Exchange Board of India (SEBI) followed by setting up the Kumar Mangalam Birla Committee on Corporate Governance, whose recommendations in December 1999 formed the basis for Clause 49 of the Listing Agreement. SEBI revised Clause 49 in late 2004 on the recommendations of the Narayana Murthy Committee on Corporate Governance, with the revisions coming into effect on January 1, 2006.

Unlike in other parts of Asia, shareholder activism emerged in India not as a response to the Asian crisis, but as a reaction to stock manipulation scandals in the early 1990s. These events gave rise to one of the country’s more established organisations, the Investor Grievances Forum. While India has a surprisingly large number of SEBI-recognised investor associations—18—activism is less developed than in other markets. Most groups are poorly funded, low-profile and barely known around the country (partly because their activities are restricted to single cities or states). This situation is epitomised by the Bombay Shareholders Association (BSA), the oldest investor organisation in India if not the region. Founded in 1928 to advocate for small shareholders who encountered abuses under the old paper-based trading system, BSA is struggling to find a new mandate, new members and funding.

India: By the numbers
"CG Watch 2005" (ACGA & CLSA)				"ACGA Asian Proxy Voting Survey 2006"
Rules	66%
Enforcement	56%			Overall score: 57% Asia ranking: 4th Qualitative assessment: Poor to fair
Political & regulatory	65%
IGAAP	75%
CG Culture	43%
Weighted score (Asia ranking)	61% (3rd)

Current Developments:

• A new Companies Act is being drafted that will reportedly allow class-action lawsuits and statutory derivative suits.
• “MCA-21”, a programme to streamline the Ministry of Company Affairs (MCA) and deter corrupt practices by its officers.
• The SEBI Act is being amended to give the regulator, among other things, more powers of investigation and prosecution.
• The Institute of Chartered Accountants (ICAI) has formed a committee to create a roadmap for the convergence of Indian accounting standards with International Financial Reporting Standards by 2008.
• SEBI formed a Committee on Disclosures and Accounting Standards in late 2006 to advise on disclosure requirements for listed companies and to facilitate the implementation of ICAI accounting standards as they relate to the capital markets.
• A code of corporate governance is being developed for public-sector enterprises (both listed and unlisted).

Strengths:

• The willingness of industry to advance corporate governance reform voluntarily, at least among top-tier companies such as Infosys, HDFC Bank and ICICI Bank. As a result, India has some of the best-governed firms in the region.
• Some mid-cap companies are beginning to see the commercial value of good governance.
• Some parts of government are making an effort to reform the management and governance of public-sector enterprises under their control. The Railway Ministry, for example, has in the space of two years transformed the railways from an organisation on the brink of bankruptcy to one that is viable and profitable.
• A free and vibrant media environment, where debate and discussion is permitted.

Weaknesses:

• A penchant for setting up official committees and enacting new regulations, but under-investing in enforcement and implementation. Neither SEBI nor MCA seem to have enough competent staff who truly understand the capital markets, although SEBI is on a recruitment drive this year and MCA has been training its officers in white-collar crime. However, it will be quite a while before serious changes are seen.
• Lack of cooperation and coordination between key government departments, in particular MCA and SEBI. As noted in the Irani Report, on which the new Companies Act is being based: “Sometimes, various agencies pursue action in their respective domain without regard to the comprehensive picture. This results in overlap of jurisdiction or regulatory gaps. There is a need to bring about coordination in the role and action of various regulatory agencies to enable effective investor protection”.
• Widespread corruption, especially within government. India is ranked 70th out of 150 countries in the “Corruption Perceptions Index 2006” produced by Transparency International.
• AGMs by law have to be held where the company's registered offices are, and quite a few companies have them in remote locations which are often difficult to get to.
• Voting is usually done by a show of hands, not by poll.
• Pre-emption rights of minority shareholders are easy to override.
• Weak shareholder protections when listed companies choose to privatise and delist.
• A lack of understanding of shareholder rights and lower levels of activism than one would expect in a country with a free media and democratic institutions.
• No rotation of lead audit partner of external auditors.
• The capacity of judiciary to deal with securities cases needs to be enhanced. Some High courts such as that of Delhi, Bombay, Calcutta and Madras are considered well equipped to deal with securities and related cases. These cases have original jurisdiction. However, only cases that belong within their territorial jurisdiction may be brought before them and only if the cases involve a certain level of pecuniary claim and above.
• Most mid- and small-cap companies do not see the value of corporate governance. Most listed companies, including many large ones, take merely a box-ticking approach.
• The current government of Manmohan Singh is weakened by its lack of a majority and is hampered in its reform efforts (such as in the privatisation of state companies).
• Entrepreneurs have a proclivity towards adopting the latest buzzwords and fads in business, starting with total quality management (TQM) in the early 1990s followed by business process reengineering (BPR), corporate governance, and now the “3 Ps” (profit, planet and people) of corporate social responsibility, but not surprisingly implement them only superficially.

India – Codes and Rules
For a concise overview of Indian company and securities law, accounting standards, listing rules and corporate governance codes, see our India Codes and Rules page. There you will find links to relevant documents and websites.

India – Annotated Links
For a concise list of major government and non-government organisations involved in corporate governance reform in India, go to our India Annotated Links page. Each link contains a brief introduction to the organisation and its website.

India – Market Briefing
ACGA, after a research trip to India in November, produced a market briefing for its members, which can be downloaded from our Premium Contents page.

© Asian Corporate Governance Association Limited, 2007