Although India has been rather slow in establishing corporate governance principles over the last two decades, 2012 was a positive year for progression in the Indian corporate governance arena. The Companies Bill 2012, passed by Lok Sabha (the lower house) on 18 December 2012, includes a number of new provisions aimed at improving the governance of public companies.
Interestingly, despite the structure of Indian businesses differing significantly from those in the UK, the foundations of the new Indian corporate governance model are drawn from the Anglo-Saxon governance model. The investor base in the Indian corporate market, for instance, largely consists of the company founders, their respective family members and the government. In contrast, shareholders in UK companies are less concentrated towards a certain group of people, are geographically dispersed and largely held by professional investors. However, despite significant differences in the corporate structure in the two markets, the corporate governance proposals recently published in India are similar to those adopted in the UK. The question therefore arises as to whether it is appropriate for a closed market to base its corporate governance model on practices developed for and in a market fundamentally different from its own.
The Indian market regulator, the Securities and Exchange Board of India (SEBI), recently issued a consultative paper on the "Review of Corporate Governance" encouraging a wider debate on governance. The paper calls for, inter alia, the splitting of the roles of chairman and chief executive, disclosure of the reasons for an independent director's resignation from office, a limit on the term of appointment of independent directors and greater involvement of institutional investors. SEBI goes on to propose making radical changes which seek to ensure that these corporate governance proposals are implemented in a market which is generally viewed as weak in the implementation of rules and regulations. These changes include:
- the appointment of independent directors by minority shareholders,
- independent directors to receive compulsory training and pass examinations; and
- the adoption of a principle-based approach for certain principles.
Although it is clear that the proposals stem from the Anglo-Saxon corporate model, in some instances they go further and introduce new initiatives which recognise the need for certain obligatory requirements and the need for training in a market that has for centuries been based on a closed board structure and investor base.
There has been a clear move in India to develop the corporate market to attract foreign investment. Foreign investment is slowly increasing shareholder diversity in some companies. This in turn pushes the agenda for the introduction of a regulated and universal corporate governance model. It appears from the recent SEBI proposals that the adoption of a corporate governance model based on the Anglo-Saxon model will be a useful starting point but the adoption of certain UK-based concepts such as 'comply or explain' should be adopted cautiously given the radical nature of certain proposals and significant effects they will have on the structure of Indian businesses. New regulatory institutions may need to be created, existing institutions strengthened and hybrid approaches adopted but, on the whole, the Anglo-Saxon model may well be a useful foundation.
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