Transplantation of Corporate Governance in Inida

Despite the fact that corporate governance concepts emerged in the outer systems of U.S. and U.K., they’ve been transplanted to many other countries as well. The transplantation has also been noted in insider systems that involves shareholding structures, and norms and practices of corporate governance. The development and emerging economies during the 20th century had open up markets for foreign investments and thus, the corporate governance systems had to be developed that were familiar to the investors. Transplantation was considered as an easy remedy for this. Out of all the transplanted concepts, the independent director posed the highest number of challenges. 

In 1992, SEBI was established in the form of Indian securities market regulator. SEBI saw reforms in the securities market which led to reforms in corporate governance as well. Considering the recommendation made by Kumar Mangalam Birla Committee, Clause 49 was inserted into the Equity Listing Agreement in 2000 that consisted of India’s corporate governance norms. 

Subsequent to the governance scandals like Enron and WorldCom, SEBI considered improving  governance norms and hence appointed Narayana Murthy Committee to evaluate clause 49, which also brought an altered version of clause 49 introduced from 1st January 2006. Provisions related to independent directors in clause 49 involve-

1. Basic Requirement- The minimum number of independent directors was dependent upon the board’s chairman identity. Where the chairman serves as an executive in the company, at least half of the board must be independent directors, and at least one third if not. 
2. Independence- Independent director is a non-executive director who doesn’t have material pecuniary relationship with company. There is no specific qualification or experience to be a director, which represents a deficiency in the definition of independence. 
3. Nomination and Appointment- There is no specific procedure for nominations and appointment of independent directors in clause 49 which makes them vulnerable to capture by controlling shareholders because directors in India are appointed individually at shareholders meeting by a separate resolution, which requires majority shareholder’s approval and voting upon the same. 
4. Allegiance of Independent Directors- Its not clear under clause 49 if the independent directors are required to serve shareholder’s body interest as whole, or give importance to minority shareholder’s interests. This makes their position futile and the institution ambiguous. 
5. Role of Independent directors- Clause 49 doesn’t state the specific role of independent directors too. They are treated same as other directors for the purposes of role and decision-making, and no particular privilege, or duty is imposed upon them. This creates obstacles at a practical level because the role/duty of independent directors neither comprehended by them nor by corporate community in general. 
6. Effectiveness of Clause 49- Clause 49 attempts to codify the concept of independent director in India. It was amended in 2004 to deal with its shortcomings. However there are drawbacks while implementing such enforcement provisions in India. 

While giving a closer glance at the basic rules governing independent directors in India, it reveals that they were implemented without adequate changes to reflect the agency problems prevalent in India. Despite the fact that the concept of independent director was evolved in the U.K and U.S, as a solution to the manager-shareholder agency problem, it has been adopted without significant changes in India. The independent director concept, for example, does nothing to address the majority-minority agency issue that exists in India. Neither has there been any sort of deliberation of whether the concept of independent director deals addresses the majority-minority agency problem at all, nor have any appropriate changes been made to its applicability to that agency problem. Therefore, a close examination of Clause 49 in India reveals a mismatch in the application  of the independent director principle, which indicates several failures in the transplant. 

Aishwarya Says:

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