OWNERSHIP PATTERNS AND CORPORATE GOVERNANCE IN INDIA.

ABSTRACT
Clause 49 mandates the corporate governance norms to be followed by Indian listed corporate This have been like other legislations borrowed from the United States a replica of the Sarbanes Oxley Act -2002.Sarbanes Oxley Act that was a legislature initiated by the US parliament post Enron, to regulate and monitor the activities of the listed corporate, and ensure that the interests of the owners are protected against the corporate misfeasance by professional managers. India followed suit with the initiative taken by Confederation of Indian Industries - CII and subsequently taken over by SEBI, the responsibility to enact a legislature which mandates compliance with stipulated norms of corporate governance inducing transparency and disclosure in all the financial transactions undertaken by the listed corporate .Clause 49 came into existence in the year 2002, as a part of the listing agreement, however it was enforced from the 1st of January 2006. This paper makes an attempt to study the ownership patterns prevalent in the Indian corporate Environment, and tries to validate the impact of the listing agreement norms in protecting the interests of the minority, and preventing corporate misfeasance .Five sectors have been identified that play a pivotal role in the Indian Business, and the ownership patterns are evaluated to identify the degree of effectiveness of Clause 49.

Dr S.N.V.Sivakumar

Prof Shanti Suresh

OWNERSHIP PATTERNS AND CORPORATE GOVERNANCE IN INDIA.

Starting with the Constitution, to the entire legislative framework, India has been adapting, and adopting laws from the western countries mainly UK, and US .India a common law country like many developed nations, follows the Anglo Saxon model for instituting a governance mechanism. The designing of the legislative framework for incorporating governance norms is on lines with the Sarbanes Oxley act 2002, passed by the United States parliament following the wide corporate collapses like Enron and the like. The stringency of the Sarbanes Oxley Act has not been so well appreciated by the Corporate Community, but the impact has been far reaching in the United States, though questions are again arising as to why the global crisis could not have been averted if corporate were so well monitored to function in the interest of the stakeholders.

The objective of this paper is 1. To Overview the corporate governance challenges in India , and study the various models prevalent across the countries 2. To survey of the Indian ownership patterns across five sectors. 3. Evaluate the suitability of the corporate governance reforms in protecting the interests of the minority shareholders.

The paper is divided into three sections, each of which makes a study of the singular aspects so as to arrive at a consensus, and provide clarity of thoughts. Section 1. An overview of corporate governance systems and prevalent legal mandates to ensure good governance among the Indian listed companies. Section 2. An Analysis of the Indian Ownership patterns across five sectors. Section 3. Make recommendations for improving the effectiveness of corporate governance practices among the Indian companies.

Section I An overview of the corporate governance Challenge. The corporate governance challenge primarily arises out of the separation of ownership and management, and the resultant agency problems. To compound the problem further the ability of owners to write effective contracts that minimize the problems is getting tougher by the day. Countries across the world, along with the academic community, are researching and reinventing mechanisms and all have started assessing the corporate governance at country or company level, drawing up guidelines and codes of practice to strengthen the issue of governance that can effectively reduce agency costs, and overcome the problems of expropriation by unscrupulous directors. International Bodies like the World Bank and OECD have developed their own set of standard principles and recommendations.

Corporate governance mechanisms differ across countries. The governance mechanism of each country gets shaped by its political, economic and legal history. OECD has taken an effective lead in evolving a set of principles of corporate governance, which are internationally recognized and serve as useful benchmarks. There have also been some welcome initiatives by the stock exchanges across many countries prescribing good governance practices for their listed companies in their countries. Institutional Investors worldwide give a lot of importance to the firms and economies that have a strong legal system, Investor protection regulations, and regulations that mandate transparent and globally acceptable accounting and governance standards. Companies that embrace high disclosure and governance standards invariably command better premium in the market and are thus able to raise capital at lower cost.

An optimal corporate governance structure is the one that would minimize institutional costs resulting from the clash of diverging interests between the management and the stakeholders. Over the years individual economies have developed different capital market mechanisms, legal structures, factor markets and private or public institutions to act as owners of corporate governance in the economy.

There are different models of Corporate Governance prevalent around the world. These differ according to the variety of Capitalism in which they are embedded. The liberal model that is common in Anglo American countries tends to give priority to the interest of the shareholders. The co-ordinate model that one finds in continental Europe and Japan recognizes the interest of workers, managers, suppliers, customers and the community. Both models have distinct competitive advantages. The liberal model of Corporate Governance encourages radical innovation and quality competition. In the US the Corporation is governed by Board of Directors, which has the power to choose Executive Officers known as the CEO. The CEO has broad powers to manage the Corporation on a daily basis, but needs to get Boards approval for certain major decision such as hiring people, raising money, acquiring another company, major capital expansion or other expensive project. Other duties of the board may include policy setting, decision-making monitoring managements performance or corporate control.

Anglo-Saxon countries have a low concentration of shareholders, In the United States and the United Kingdom most of the shares are in the hands of the agents of financial institutions (more than 50%) rather than private persons (20-30%). Due to regulations in the Anglo-Saxon countries, many financial institutions are not allowed to hold shares in publicly listed companies on their own behalf. They mainly act as agents. The shareholdings of financial institutions can be divided into two groups banks on the one hand, and insurance companies, along with investment and pension funds on the other. Banks hold few shares in the equity of the companies because of conflicts of interest, which appear when they also grant debt to those companies. The Anglo-Saxon model of corporate governance requires listed companies to have unitary boards, independent outside directors, and board committees. The principles focused on enhancing shareholder value, and in the process richly reward top executives. In this model shareholders are widely dispersed, in markets that are liquid, with the discipline of hostile bids. Because of the low concentration of shareholders in Anglo-Saxon countries, most shareholders do not have significant power in any firm. This leaves management with the power to decide on many of the problems concerning the company .In the Anglo-Saxon model, management has the power to make decisions, and these decisions will frequently be in their own interest, which gives rise to over-investment. Management prefers to undertake expansion activities that facilitate the diversification and reduction of their individual risk profile , as this enhances their power.

Investments will thus be made even if the profitability is low or negative. Over-investment will thus give power to management, but leaves shareholders with a lower profitability because managers will invest even though profit prospects are poor (Jensen, 1986 in Garvey and Swan, 1994). Renne boog (1996) says that if voting power is dispersed, as in Anglo-Saxon countries, free riding will occur. This means that a single shareholder will bear the costs of control, but will only benefit from it in the percentage of his stake in the firm. Because the costs of control exceed the benefits, shareholders tend not to take action. Consequently, management will have dominant power in the firm. This characteristic of the corporate governance system in Anglo-Saxon countries, delegating great power to management, tends to produce a short-term orientation of management.

In the United States, Sarbanes Oxley mandated conformance with corporate governance by law. Whilst in the United Kingdom and those other jurisdictions whose company law has been influenced over the years by UK common law, including Australia, Hong Kong, India, Singapore and South Africa, compliance is based on a voluntary comply or explain philosophy. Companies report compliance with the corporate governance code or explain why they have not. The suitability of the Anglo-Saxon system and its competitiveness to regulate and monitor the corporate has become highly questionable after the global crisis . In Japan, keiretsu organizational networks spread power around a group of inter-connected companies in ways that might provide insights for complex western groups. The view that business involves relationships with all those involved employees, customers, suppliers, and society, as well as shareholders, has only recently been recognized in the West under the umbrella of corporate social responsibility. The governance of Chinese family businesses throughout East Asia can provide some valuable insights: for example, the emphasis on top-level leadership, the view that the independence of outside directors is less important than their character and business ability, and the way that the Chinese family business sees business more as a succession of trades rather than the building of empires. In China, the link between state, at the national, provincial and local levels, and

companies relies on a network of relationships, and policies can be pursued in the interests of the people, seen as the Party. These diverse models reflect more concentrated ownership, different cultures, and varied company law jurisdictions. But they also show different perceptions about the way power should be exercised over corporate entities. The eastern experience suggests that board leadership and board-level culture, in other words people and the way they behave, are more important than board structures and strictures, rules and regulations Continental European companies hold large stakes in other (related) companies and shareholding also moves in the opposite direction. The existence of different holding and pyramidal structures in these companies regulates the diverse patterns of control, which are often maintained over the long term. Due to the number of mutual shareholdings and the limited extent of information disclosure, the ownership structure in Continental European countries is not as transparent as in Anglo-Saxon countries. Regulations such as anti-trust laws and the "arm's length rule" between parent and daughter companies have limited the complexity of the ownership structure in AngloSaxon countries (Van Hulle, 1997).

Because the Continental European model grants great power to a few shareholders, those shareholders will retain control over the firm and make decisions that enhance the profitability of the firm instead of enlarging the firms size through large investments. They normally invest for a longer time span and thus will be more long-term oriented than managers in the AngloSaxon model. In the concentrated shareholder model of Continental Europe, the ownership structure of many firms is characterized by the participation of control and holding structures. Through these mechanisms, shareholders retain power over their investments, while the complex patterns of control deny transparency to the company's structure. Another disadvantage of the Continental European model lies in the limited financial resources that are available to companies. Because ownership is concentrated, only a few owners are suppliers of the equity to the firm. The transfer of cash flow from one company to another is a common practice in Continental European countries. Due to the lack of transparency, companies are able to transfer cash flow from a well performing company to a related, but badly performing company.

The Indian Model The Indian model is an amalgam of the Anglo American and German models .The Indian corporate can be typified into two distinct patterns i.e. private companies, public enterprises and the pattern of private companies is, mostly that of closely held or dominated by a promoter Group. The role of external equity finance was low; in the early 80s the business was financed by retained earnings and heavily by debt, like the Tata, Birla and Reliance Group. However since the process of liberalization and globalization there has been a shift in the financing patterns, and equity stakes have assumed high proportion, and the governance issue is that of protecting the interests of the diversified minority shareholders from the vested interests of the dominant shareholder. Agency problems occupy top slot in these concerns. The organizations are run with the prime objective of maximizing profits, and optimizing the interests of the promoter shareholders. In respect of public enterprises, the primary owners of the business, the majority stakes are held by the Central and State Governments. In these organizations the protections of the interests of the stakeholders take a back seat. Large corporations are therefore often run in the interests of the government and bureaucracy. The objectives are socially driven, which are attained at the cost of profitability and efficiency. The appropriation of corporate opportunities, excessive compensation, and consumption of managerial perks are not relevant as the boards are appointed by the government, and they have to function as per the external policy of the government. The main characteristic of the Indian Model is the Agency issue primarily is between the dominant promoters who control the management and control of the organization Vs the minority shareholders in the organization. Being diffused over a wide geographical region and lack of any shareholder activism in the Indian business environment has made the minority a vulnerable group that has no representation or proxy who could effectively protect their interest against the erring dominant promoters

Reforms and corporate governance in India

A wave of economic reforms was initiated in India in the year 1991. SEBI the market regulator was formulated and established in the year 1992. The initial drive for better corporate governance, however, came after the onset of international competition consequent to liberalization of economy

that began in 1990. At least five developments are responsible in India for the intense focus on corporate governance issues: (i) Many companies were falling behind in the rate at which they were investing in new plants and equipments, or introducing new products. Indian companies were abandoning markets to foreign competitors rather than committing themselves to stay in and compete harder for market share. (ii) The attempted hostile takeovers and corporate restructuring, the financial market pressures to focus on quarters earnings, even at the expense of long-run performance and the development of numerous other takeover strategies and defenses raised legal and policy questions about the right of shareholders, the role of directors, and their responsibilities to various corporate constituents. (iii) A huge increase in the compensation packages of corporate executives, even in companies that were slipping badly in their return to investors. (iv) The continuous process of downsizing virtually in every sector of the economy, and (v) various corporate frauds and securities scams which brought corporate governance issues to the forefront. The need of the hour was investor protection and building confidence in the Indian markets and hence SEBI rapidly began ushering in securities market reforms that gradually led to corporate governance reforms as well. In India the first corporate governance initiative was made by the CII confederation of Indian Industries in 1998. The Desirable code for Corporate Governance, which was promulgated and voluntarily adopted by a few companies. Post the CII initiative SEBI formed a committee headed by Mr. Kumar Mangalam Birla to formulate the code for the Indian listed companies and thereby promote and raise the standard of Corporate Governance in of listed companies. It was post Enron , when the enactment of the Sarbanes-Oxley Act was initiated by the US parliament , SEBI appointed the Narayana Murthy Committee to examine Clause 49 and recommend changes to the existing Clause 49. SEBI, on 29 October 2004, issued a revised version of Clause 49 that was to come into effect on 1 April 2005.The Indian listed corporate were not in a state of preparedness to adhere by the stringent requirements of the revised clause 49, and hence the implementation was deferred to January 2006, when all corporate had to effectively comply with the Norms as stipulated by the revised Clause 49.

Some of the mandatory requirement s as prescribed by the Clause 49 that will be checked for its effectiveness in this paper is listed as follows: The requirement of 50% of Independent Directors on the boards of companies which have the Chairman of the board also heading the Management

The appointment of independent Directors. The appointment of Auditors of the company. The definition of the Independent Directors Listed companies must have audit committees of the board with a minimum of three directors, two-thirds of whom must be independent the roles and responsibilities of the audit committee are specified in detail

Listed companies must periodically make various disclosures regarding financial and other matters to ensure transparency;

The CEO and CFO of listed companies must (a) certify that the financial statements are fair and (b) accept responsibility for internal controls; and (v) annual reports of listed companies must carry status reports about compliance with corporate governance norms.
Structure of Corporate Ownership in India Family and Business Groups Ownership: For the purpose of ownership, Indian companies can be classified into four categories: publicly held companies, privately held companies, family controlled companies, and the state owned (Government) companies. The structure of the ownership, even in the publicly held companies is unusual. Most of these companies, even the listed ones, have a dominant owner who is very often involved in the management of the company. Business groups are notable feature of the Indian corporate sector. They are organized through extensive crossownership and are often dominated by a controlling family, who has good contacts in the government. Thus, Indian companies are still controlled by the founder promoter and his family members who on an average own a minority of shares, often as few as 10 percent, and through cross-holding control another 30% to 40%, of the group member firms. These controlling groups are known as promoters, as in the distant past, they did promote the companies. In listed companies, a large block of equity of about 30 - 50% is held by public financial institutions (both foreign and domestic), which seldom sell their shares and rarely challenge the promoters. This type of ownership structure has its roots in the pre-independence managing agency system that was abolished on 1 April, 1970. But there are few signs of a well-functioning corporate control in this structure. One reason for this is that a typical public corporation is closely held and in most of the cases is dominated by the founder and his family or his associates. Secondly, the external equity is relatively small part of capital structure. The bulk of finance is supplied by bank debt and retained earnings. Bank debt is often provided on a subsidized basis from government-controlled banks. Given these financing sources, along with the limited legal rights of minority shareholders, public companies face little pressure for change until the crisis hits the company. The government has also pursued a number of policies with the aim of achieving wider shareholding and discouragement

of any active market in shares. The takeover code also provides that no one may raise shareholdin g above 10 percent without making a prior public announcement of intention and a public offer to purchase 20% holding at the average market price of the previous six months, and thus acquire at least a 30 percent holding. Listing on the first-tier of the stock exchange now requires that over 40% of the companys stock be held by shareholders owning less than 1%, and that the principal owner and his family own not more than 51%. Cross-shareholdings by a firm may not exceed 25% of its net equity capital. A bank cannot without the permission of the RBI own more than 10% of a companys shares. Institutional Shareholders: Financial Institutions own more corporate equity than individual shareholders. Mutual funds have become more acceptable investment vehicle. Financial assets held by financial institutions exploded after 1991. The holding of the Financial Institutions is concentrated in the larger companies. While any one institution typically owned a relatively small portion of a corporations equity, some institutions hold substantial, if taken as a group. These institutional owners are professional owners. They exercise almost all the rights and privileges of equity ownership. They buy and sell, they vote proxies, make proxy proposals, monitor portfolios firms, and communicate their concerns to management. The fiduciary duty empowers and legally requires Financial Institutions to act conservatively and vigorously to promote their beneficiaries interests. This has led institutional investors to promote corporate governance reforms that strengthen their ability to act as owners, to vigorously monitor under-performing portfolio companies, and to oppose management when they determine that it is not acting in the best interests of the shareholders. Government Ownership: Government is a major shareholder in the corporate sector. The Government has holdings in private sector either through the public financial institutions or a government companys subsidiary.

The ownership patterns across the various sectors analysed. Table 1: Automobile sector:

Ownership pattern in the Automobile sector

Tata Motors Promoters Financial Institutions Retail Investors Pension Funds Mutual Funds Promoters Financial Institutions Retail Investors Pension Funds Mutual Funds 38.08 15.08 9.42 0 2.23 38.08 15.08 9.42 0 2.23

Hero Honda Motors 28.96 4.68 7.79 0 3.17 28.96 4.68 7.79 0 3.17

Maruti Suzuki 54.21 39.14 6.64 0 0 54.21 39.14 6.64 0 0

Bajaj Auto 49.61 23.86 26.4 0 0 49.61 23.86 26.4 0 0

Ashok Leylan d 38.6 32.12 15.83 0 0 38.6 32.12 15.83 0 0

TVS Motors 60.44 16.96 22.58 0 0 60.44 16.96 22.58 0 0

Eicher Motors 55.9 20.67 23.41 0 0 55.9 20.67 23.41 0 0

Force motors 51.75 2.16 48.24 0 0 51.75 2.16 48.24 0 0

Hindus tan Motors 27.14 8.43 64.41 0 0 27.14 8.43 64.41 0 0

Swaraj Mazda 53.52 18.15 28.32 0 0 53.52 18.15 28.32 0 0

70 60 OWNERSHIP PATTERN 50 40 30 20 10 0 Promoters Financial Institutions Retail Investors Pension Funds Mutual Funds

TOP TEN COMPANIES IN THE AUTOMOBILE SECTOR

An analysis of this sector brings to light that in every large corporate in this sector that includes the top ten companies that have the highest market capitalization in this sector are all dominated

by the promoter group which forms the dominant group, except in the case Hindustan motors where the retail investors hold a large fraction of the share holding .In the case of the Tata Group the holding along with the total holding by all the affiliate bodies and the Tata Investment Company together holds a major holding in all the Tata concerns .Hence in this sector the minority holding by the Retail investors need the protection from the expropriation of the dominant group. Thus the process of having outsiders as monitors to supervise and align the activities of the Dominant shareholders with the interest of the minority shareholders becomes highly ineffective as the appointments and nominations are all in connivance with the sanctions made by the dominant shareholder.

Table 2.Pharmaceutical Industry

The Indian pharmaceutical Industry is presently ranked among the best performing sectors not only in the country but, its products are finding a mark in the world markets .However unlike the American organizations which have a diversified share holding pattern, this sector also has a concentrated ownership holding wherein the average holding by the promoter group in all the top ten companies is an average of approximately 50% and above ,Except in the case of Dr Reddy where the financial institutions have a substantial holding. This again does not take care of the agency issues between the minority and the dominant shareholder, as the interests of the Financial institutions may not be aligned with the interests of the minority shareholders who look for long term value creation, while the financial institutions may focus on short term value creation .Hence there could be an aggravation in conflict of interest than an alignment of the common interest. This sector again is dominated by Promoter driven ownership and control patterns where an outsider monitored governance system will be ineffective in yielding the required results.

Table 3: The Banking Industry. This Industry has a direct bearing on the interests of a varied section of stakeholders .Hence this sector needs to be well governed and monitored as any misfeasance in this sector can have a contagion impact on the economy. There has been a liberalization in terms of licensing granted to various business groups to commence banking operations in India .The monetary regulator plays a very active role in regulating the banking sector , and in ensuring that the Banks dealing with the public funds satisfy all prudential norms as stipulated , and abide by the Basel II standards .With the opening of the banking sector private banking has taken off in a big way , with banks like ICICI, and HDFC taking lead not only in the aggressive marketing for a share of the pie, but have taken large strides in establishing a sound governance system , for ensuring the safety and liquidity of the public money, while abiding by the rule of the land.

The banking sector barring the few large private sector banks is dominated by the public sector banks , which are required to follow the stringent and conservative norms of the RBI-the monetary regulator .The agency issue arising in organizations which are dominated by government holding are that the profitability of these businesses are often sacrificed for the socialistic goals of the government .Thereby not optimizing the resources of the investors , or allocation of funds to low return securities according to the priorities set by the government . ICICI Bank leading the pack, with Yes bank, HDFC Bank and Axis bank have substantial stakes by institutional investors, and hence probably that is the reason they are able to play the financial games better, with large access to funding and aggressive marketing strategies

S.No.

Companies

Promoters

Non Promoters (Institution)

Non Promoters (Non Institution)

Custodians

1 2 3 4 5 6 8 9 10

Axis Bank Bank of India ICICI Bank IDBI Bank PNB SBI HDFC UBI Yes Bank

38.54% 64.47% 0.00% 52.67% 57.80% 59.41% 23.73% 84.20% 30.72%

40.21% 27.33% 61.15% 27.15% 37.36% 27.22% 38.63% 9.17% 58.02%

12.89% 8.20% 9.91% 20.18% 4.84% 9.70% 19.92% 6.64% 11.26%

8.36% 0.00% 28.94% 0.00% 0.00% 3.66% 17.72% 0.00% 0.00%

Table 4: Information Technology Sector

Information Technology

S.No.

Companies
Promoters Financial Institutions FIIs 17.91% 34.85% 17.26% 0.45% 13.45% 2.42% 8.62% 10.00% 1.36% 5.91%

Ownership
Retail Investors Pension Funds 4.20% 16.89% 5.6% 11.05% 3.33% 16.63% 19.89% 5.04% 10.90% 3.31% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Mutual Funds 2.16% 3.58% 6.23% 2.07% 1.78% 0.30% 1.07% 2.47% 1.54% 0.68%

1 2 3 4 5 6 7 8 9 10

HCL Technologies Infosys Tech. MphasiS Oracle Fin.Serv. Patni Polaris Soft Satyam Computer TCS Tech Mahindra Wipro

68.15% 16.49% 60.65% 80.56% 47.60% 29.17% 42.68% 73.75% 83.32% 79.26%

0.06% 4.16% 0.64% 0.03% 1.15% 23.58% 0.10% 5.39% 0.43% 0.07%

This sector derives its importance from the amount of foreign exchange it earns for the Indian Exchequer .The Industry is dominated by the few companies which have had the opportunity to access funds from the international Markets .The governance of this sector has to be on lines with the international benchmarks as that is the market they serve and all their business earnings depend on the service excellence that they are able to deliver to the international clients , and the quality of Products that they develop. Though the sector has a large exposure to the international markets, just one company has the ownership pattern as the professional and diversified companies of US, Infosys. Infosys is the only company which stands high on governance standards and its compliance is with the Sarbanes Oxley , and several international mandates is a subject matter of consideration. All the other companies from TCS to Wipro have a concentrated share holding pattern wherein the promoter holding far exceeds the nominal level of 51%.The average holding amounts to about 65%, and herein again the agency issues emerging are that of aligning the interests of the minority shareholder with that of the dominant shareholder. In most of these companies corporate governance has indeed become a ritual of tick box method, that actually ensuring that the interests of the various sections are protected.

Table 5: The power sector:

The lead sector crucial for the sustainable development of business in any economy. This sector calls for heavy investment, with long gestation periods , and if often funded with a large proportion of equity. The dominant players in this sector are the public sector players as the Investment requirement are very huge, and the profitability will often be after a long period. Like all other sectors this sector is also dominated by the concentrated promoter holding , where in the average holding is approximately 60% .This clearly brings to focus the diverse sections of minority shareholding and the protection of interests by mandating the external agencies like the Independent Directors , and the external Auditors be assigned the responsibility of ensuring good governance .When the controls are in the hands of the controlling managers, there is limited scope for the independent directors and auditors to raise their voice against these promoter groups a for it is they who appoint them, and also they are the deciding authority with respect to the compensation , and reappointment .

S.No.

Companies Tata power NHPC(AP priced) Reliance power NTPC

1 2
3

4 5 6 7 8 9 10

RELIANCE INFRA INDOWIND EDC GVK JINDAL Power GRID

Promoters fund 33.26 100.00 89.92 100%(GOI) 53.38 46.36 56.36 60.94 58.75 86.36

Public Shareholding 47.87 NIL 4.52 37.55 21.26 1.09 29.58 12.08 5.92 18.77 NIL 5.56 9.07 32.38 42.54 9.43 29.17 7.72

Family owned business houses in India followed a particular style of governance, which suited their personal interests. The stakeholders considered them as acronyms of competence and trust. The meager holding of the families in their companys capital, non -transparency in company operation at various levels and matters and superficial show of professionalism on the board with no public disclosure did not bring any effective intervention by stakeholders in a protected economy till the seventies in India. Non-separation of ownership from the management generated corruption in

business and resulted in denial of enhancement in the value to the stakeholders investment. The fundamental concern of corporate governance, however, has remained to ensure the means by which a companys managers are held accountable to capital providers for an efficient use of assets of the company. The last five years have, nevertheless, witnessed a proliferation of corporate governance guidelines, reports and codes designed to improve the transparency in company operations and focus on liability of directors and to hold them accountable. Although, the board of directors provide an important mechanism for holding management accountable, effective corporate governance still has to be supported by and is dependent on capital market for corporate control, securities regulation, company law, accounting and auditing standards, bankruptcy laws, stock exchange listing rules and judicial enforcements.

The board structure distinguishes between those directors who hold management positions in the company and those who do not. Those who occupy management positions are referred to as the executive directors. Two variants of the non-executive directors do exist-one, who are genuinely independent of the companys affairs, other than holding their board appointment and receiving sitting fees only. On the other hand, there the non-executive directors in the board, whose positions might bring their objectivity and independence into questions. For example, a retired executive of the company (who is receiving companys retirement benefits) now sitting on the board, as a director being the representative of a major block of shares, a significant supplier, customer etc. These directors are not independent from the point of view of accountability because of their sectional interests.
In the all-executive board there is really no separation

between ownership and management as the management is dominated by the owners/promoters of the business. Before the corporate governance came into prominence, most of the boards in the countries like, the UK, India used to be all-executive boards. In the majority executive board, the non-executive directors are appointed in small proportions, say, 2 or 3 in the board member. Most of the boards in the UK and India are the majority executive boards.

In the majority outside board where non-executive directors form the majority on the board, particularly the independent majority, such board as exists in the USA and Australia, can emphasize checks and balances, and keep close supervision of management performance . In fact, the reliance on independent outside directors in the unitary board to provide a separation of function and check

on management has been reflected much in the corporate world in the growing use of audit committee, nomination committee and remuneration committee of the main board.\

It is observed that board size of the large Indian companies in automobile, banking, diversified, petroleum and natural gas, cement, textile, iron and steel, and telecom sectors is generally broadbased (around 11 to 16 board members). On the other hand, almost all IT and pharmaceutical companies boards are small, ranging between 4 to 9 members. The analyses of companies listed under BSE Sensex and NSE Nifty reveal that 29% of such companies have single-digit board size, ranging from 4 to 9 board members, whereas the rest 71% of the companies have double-digit board size of the public sector undertakings (PSUs) and the public sector banks (PSBs) is large as compared to that of most of the private sector companies in India.

Similarly, the board style also varies from companies to companies depending on board expectations and leadership. Partly, it is the result of power base and the role of the board and partly it is the function of the companys history, its culture, value and belief systems and the norms of the industry. But basically the board style evolves under the leadership of the particular chairman and the chemistry of the board members at the time.

In India, 54%, of the listed companies do have chairman/CMDs in the helm of affairs as executive chairman/CMDs. The rest 46% of the companies do have non-executive chairman in their boards and are run by the managing directors/CEOs. It also reveals that the position of chairman and CEO/managing director has been segregated in a majority of private sector companies, whereas, by contrast, the incidence of chairman-CEO duality remains wholly intact (100%) in the PSUs due to government policy. Measures to Restore Investors Confidence Although much progress has been made in modernizing the security exchanges, substantial problems, nevertheless remain. An important issue is to restore confidence among small investors. One reason for the reluctance of small investors to enter the market is the low level of confidence about corporate governance in many listed companies. Information disclosures by the listed companies are still poor by international standards, and are not conducive to the creation of market efficiency. Corporate governance standards are weak, and neither regulation nor large institutional shareholders have

succeeded in rapidly strengthening them. A pre-condition for healthy capital market is the existence of institutions, which ensure high levels of corporate governance. These include high standards of accountancy to ensure transparency in financial performance, active involvement of institutional investors in monitoring performance based on good quality equity research inputs and also codes of corporate governance which are designed to ensure that managements are subjected to effective oversight by boards and those shareholders interests are protected. Indias capital market is as yet far from this ideal though some corrective processes are at work. There is a need to upgrade information through better auditing and accounting.