Umakanth Varottil

Developing the Market for Corporate Bonds in India

The corporate bonds market is not only underdeveloped in India in comparison with the equity market, but also considerably lags that market in point of time. Despite various efforts, the corporate bonds market has not expanded to any meaningful extent. In this paper, we identify the elements of an appropriate legal framework that undergirds a liquid and vibrant corporate bonds market. These elements are the proper and timely enforcement of contracts, a robust corporate insolvency framework, standardization and transparency in the primary markets, and greater protection against opportunistic behavior between creditors and borrowers. Our central argument in this paper is that the weaknesses in these elements in India amount to legal impediments that inhibit the smooth operation of the bonds market in India. Consequently, any reform process ought to address these legal impediments.

Microfinance and the Corporate Governance Conundrum

Microfinance evolved as an instrument to reduce poverty and bring about sustainable development. As an alternative to traditional means of finance such as banking and insurance (which failed to meet the needs of poorer sections of society), microfinance was pioneered by self-help groups, non-governmental organizations and other non-profit institutions. However, with a view to building a scalable model that engenders overall sustainable development, the microfinance sector has witnessed the emergence of for-profit institutions that are structured along the lines of the modern business corporation. These microfinance companies adopt market-based mechanisms to raise capital that is employed in financing the poor and less-privileged. From a corporate governance perspective, microfinance companies and their boards of directors are faced with the classic dilemma. On the one hand, it is recognized that the principal goal of microfinance is to reduce poverty; to that extent the interests of borrowers (or customers) as principal stakeholders becomes paramount. On the other hand, a shareholder-centric approach operates as a major countervailing factor by compelling microfinance companies to generate profits to service investors and maintain stock price. The current discourse in corporate governance does not appear to satisfactorily address the predicament of boards of microfinance companies. This is due to the fact that investors and stock markets judge them against standards imposed by corporate governance norms and practices that are generally applicable in the corporate sector. This article argues that the employment of conventional concepts and doctrines in corporate governance to for-profit microfinance companies does not adequately address the issues specific to such companies. It calls for a paradigm-shift that necessitates examination of corporate governance in microfinance companies through an altogether different lens. After considering the available empirical evidence and analyzing qualitative data generated from case studies and field interviews, it seeks to develop separate parameters for measuring the correlation between corporate governance and performance of microfinance companies, such that the overarching goals of reducing poverty are not diluted.

State-Owned Enterprises in Singapore: Historical Insights into a Potential Model for Reform

State owned enterprises are generally regarded as inefficient firms because of political objectives, external interference, and corruption. Notwithstanding this, studies have shown that Singapore state owned enterprises exhibit higher valuations than those of non-GLCs after controlling for firm specific factors and also have better corporate governance practices. In this paper, the authors posit an explanation. This explanation draws on the political, social and economic context that Singapore found herself in during the period of self-governance to the early years of independence from the late 1950s to the early 70s. The paper offers the view that the difficult economic conditions coupled with a contested democratic political environment in Singapore during this period played a significant role in fostering good political governance in Singapore which was in turn transposed to her state owned enterprises.

Shareholder Empowerment in Controlled Companies: The Case of Singapore

Prevailing corporate governance literature has incontrovertibly identified the agency problems in controlled companies as those between the controlling shareholders (agent) and the minority shareholders (principal) or the “controller-minority” or “horizontal” agency problem While several corporate governance strategies have been proffered to address these agency problems in the broader milieu, here we raise and discuss two specific strategies that may be potentially deployed to address the agency problems in controlled companies. These are: (i) the participative strategy, wherein shareholders (particularly the minority) are enabled and encouraged to exercise greater participation in companies in which they have invested so as to strengthen shareholder democracy; and (ii) controlling strategy, wherein the focus is on controlling or regulating the actions of the controlling shareholders rather than empowering the minority shareholders. The core argument in this chapter is that given the predominant ownership and control exercised by the controlling shareholders in controlled companies, the participative strategy is sure to be met with impediments. Any amount of additions to the powers of the minority shareholders in corporate democracy would not be meaningful if they are required to exercise it in the shadow of a controlling shareholder’s dominance. Given the ineffectiveness of the participative strategy, the corporate governance efforts in controlled companies may instead be better spent on the controlling strategy. A system of greater monitoring of controlling shareholders, especially on matters where such shareholders may be interested, such as self-dealing transactions, would augur to the benefit of the minority shareholders. We explore these strategies by concentrating on one jurisdiction, i.e. Singapore. The study of Singapore is interesting because it ranks highly among Asian economies against indicators for corporate governance and investor protection. At the same time, the corporate sphere is replete with controlled companies, where dominant control is exercised either by business families or the state. Singapore thus provides an eminently suitable case study for when the participative strategy might work (if at all) and how that might be bolstered through the operation of the controlling strategy so as to protect the minority shareholders and address the agency problem relevant to controlled companies.

The stakeholder approach to corporate law: a historical perspective from India

The purpose of this paper is to examine the historical evolution of corporate law in India from the first corporate legislation in 1850 until the present in order to assess the manner in which such legislation has addressed the question of corporate purpose. Such evolution straddles the colonial period until 1947 when Indian companies legislation largely replicated parallel English legislation, and the post-colonial period when Indian corporate law began to deviate from its English origins on several aspects. As this paper demonstrates, early companies legislation in India during the colonial period largely treated a company as a private matter (similar to the nexus of contracts theory) with limited focus (if at all) on non-shareholder constituencies. This was consistent with the role of management in ensuring shareholder value maximization. This can be attributed to England’s own focus in that direction at the time. However, in the years following decolonization in 1947, the purpose of the company began undergoing metamorphosis with greater prominence being given to the public nature of the company and the impact of its actions on society. After a brief oscillation in the approach in the 1990s, recent reforms in corporate law culminating in the enactment of the Companies Act, 2013 have firmly ensconced the company within the framework of the stakeholder theory, and away from a pure shareholder maximization approach advocated by the nexus of contracts theory. The reasons for this sea change in approach are embedded in the political economy of the country, especially in the years following independence.

Analysing the CSR Spending Requirements Under Indian Company Law

The concept of corporate social responsibility (CSR) found its place in the Companies Act, 2013 in India whereby every company of a certain size is, among other things, required to spend a percentage of its average net profits in pursuance of its CSR policy towards specified activities. This chapter analyses the merits and disadvantages of imposing CSR obligations through legislation as opposed to a voluntary mechanism to be adopted by companies as part of business activity. After discussing the evolution of CSR norms in India, the underlying rationale for their introduction, and the manner in which they are being implemented, the chapter offers a critique of the Indian approach and suggestions for the future.

The Significance of Moving Beyond Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) has been widely studied for a long time by, for example, management studies and political sciences (Carroll et al. 2012; Scherer and Palazzo 2011), but has for a long time only played a minor role in law and legal scholarship. One of the main reasons for this was that CSR was traditionally considered to be ‘above and beyond’ what companies are required to do by law. Characterised by a soft law approach voluntary CSR standards were typically, developed by corporations, by NGOs and by international organisations. However, recurrent reports about human rights violations in global supply chains and the actions of companies in the wake of the global financial and economic crisis have questioned the soft law approach to CSR and has put a ‘hard law’ law approach on the agenda.

Corporate Governance in India: The Transition from Code to Statute

This chapter explores the evolution and implementation of corporate governance norms in India. While India initially jumped on the bandwagon of countries adopting voluntary codes of corporate governance following the Cadbury Report, the approach towards “soft law” was rather quickly jettisoned in favour of a mandatory approach towards corporate governance. As a result of more recent reforms, corporate governance norms have now become well ensconced almost in their entirety in the primary corporate legislation (a phenomenon this chapter refers to as the “ultra-mandatory” approach), arguably more so than most jurisdictions. As this chapter demonstrates, voluntary codes are ill-equipped to serve their goals in dissimilar jurisdictions, as their success is dependent upon a cocktail of factors that may not be present in all legal systems.

Regulating equity crowdfunding in India: walking a tightrope: A Survey of Legal and Regulatory Trends

Start-up companies face difficulties in raising finances, and the situation has intensified since the global financial crisis in 2008. As a result, crowdfunding has made its appearance as an attractive alternative capital-raising mechanism by harnessing technology (primarily the Internet) to access funding from the “crowd.”In this chapter, we explore the core question of how should one regulate equity crowdfunding in a manner that enhances its appeal to engender the development of small and new-age businesses through accessible funding opportunities and at the same time protect investors against undue risks, such as fraud, which arise from the activity. We analyse the regulatory conundrum on equity crowdfunding by examining the legal regime for crowdfunding in India. The rules relating to fundraising by companies in India have been considerably tightened under the Companies Act, 2013 that limits crowdfunding activity. However, the Securities and Exchange Board of India (SEBI) has issued a consultation paper that proposes a framework for ushering in crowdfunding in India. We find that the unduly onerous conditions imposed by SEBI have the effect of deterring rather than promoting the growth of crowdfunding. The existing (and proposed) legal framework in India have erred on the side of caution and sought to emphasise more on investor protection than to engender the market for crowdfunding.

Board Independence in India: From Form to Function?

In this paper we explore the application and evolution of board independence in India, where concentration of shareholdings in public companies is the norm, what effects it has had, and how one might make the best use of the board independence concept in the Indian environment. Following India’s liberalization in the early 1990s, the first foray into board independence came in the form of a voluntary code recommended by the Confederation of Indian Industry, which was later on adopted in a revised form by the Securities and Exchange Board of India (SEBI) as a mandatory requirement. This formal phase was influenced by developments around the world, thereby displaying signs of a legal transplant. However, we argue that the formal independence requirements gave rise to considerable doubts as to the functional impact of independent directors.We also discuss the most recent set of reforms to corporate law in India which are moving away from the earlier conception of board independence imported into India and towards greater functionality by adapting the concept to the environment in India. A new legislation, the Companies Act, 2013, provides extensive powers and responsibilities and imposes significant liabilities on independent directors that transform their role to one that emphasizes monitoring. Interestingly, this transformation in India is not the result of international developments, such as the global financial crisis, that called into question the role of independent directors, but the result of internal systemic shocks due to local corporate governance scandals. Although these steps are positive, much is still required before board independence becomes more effective in India. We conclude with some suggested reforms that may further push the board independence concept towards greater effectiveness in India.