THE EFFECTS OF OWNERSHIP STRUCTURE ON CORPORATE GOVERNANCE AND

PERFORMANCE: AN EMPIRICAL ASSESSMENT IN INDIA

RESEARCH PROJECT NFCG

2007-2008

Principal Investigator Dr. Parmjit Kaur University Business School Panjab University Chandigarh

Co-Joint Investigator Dr. Suveera Gill

University Business School Panjab University

Chandigarh

Preface and Acknowledgements

i

PREFACE AND PREFACE AND PREFACE AND PREFACE AND ACKNOWLEDGEMENTACKNOWLEDGEMENTACKNOWLEDGEMENTACKNOWLEDGEMENTSSSS India’s growth rates have been amongst the highest in the world since its economic reforms in

the 1980s. Its market infrastructure has advanced while corporate governance has progressed faster

than in many other emerging market economies. This growth brings with it an acute need to

understand the dynamics of corporate governance within an international context. The objective(s) of

the present empirical study included inter-alia The Effects of Ownership Structure on Corporate

Governance and Performance: An Empirical Assessment in India. The subject of the present research

project was chosen because it is a classic phenomenon that has been studied and discussed at least since

Adam Smith wrote his famous book ‘The Wealth of Nations’ in 1776. An examination of corporate

governance issues especially those concerning ownership structures and performance yield important

insights into the topic and provide a fresh perspective on what has become an increasingly

international debate.

The study has been conducted under the aegis of the National Foundation for Corporate

Governance (NFCG), 2007-2008 and we are thankful to them for providing financial assistance.

We express thanks to the chairman, University Business School, Panjab University for

providing necessary support and constant encouragement.

Our sincere thanks go to Ms. Gurpreet Kaur Dhatt for facilitating the successful completion

of the research project.

We extend our gratitude to our respected families who have been a constant source of

encouragement.

Principal InvestigatorPrincipal InvestigatorPrincipal InvestigatorPrincipal Investigator Dr. Parmjit Kaur

Co Co Co Co----Joint InvestigatorJoint InvestigatorJoint InvestigatorJoint Investigator Dr. Suveera Gill

Acronyms and Indian Numerals Used

ii

ACRONYMS AAIFR Appellate Authority of Industrial and Financial Reconstruction

ADR American Depository Receipts

AS Accounting Standard

BFS Board for Financial Supervision

BIFR Board for Financial and Industrial Reconstruction

BRPSE Board for Reconstruction of Public Sector Enterprises

BSE Bombay Stock Exchange

BV Book Value

CA Current Assets

CAMELS Capital adequacy, Asset quality, Management, Earnings, Liquidity and

Systems and controls

CAPM Capital Asset Pricing Model

CCI Competition Commission of India

CDSL Central Depository Services Limited

CEO Chief Executive Officer

CFO Chief Financial Officer

CGR Corporate Governance Rating

CII Confederation of Indian Industry

CL Current Liabilities

CMIE Center for Monitoring the Indian Economy

CPSE Central Public Sector Enterprises

CRISIL Credit Rating and Information Services of India Limited

DRTs Debt Recovery Tribunals

EBIT Earnings before Interest and Tax

FA Fixed assets

FDI Foreign Direct Investment

FI Financial Institution

FII’s Foreign Institutional Investors

FY Financial Year

Acronyms and Indian Numerals Used

iii

GDP Gross Domestic Product

GDR Global Depository Receipts

GVC Governance and Value Creation

ICAI Institute of Chartered Accountants of India

ICRA Investment Information and Credit Rating Agency of India

IFRS International Financial Reporting Standards

INV Investments

IPOs Initial Public Offers

IRDA Insurance Regulatory and Development Authority

KMBC Kumar Mangalam Birla Committee

KMO Kaiser-Meyer-Olkin

LSE London Stock Exchange

MCA Ministry of Corporate Affairs

MOF Ministry of Finance

MOU Memorandum of Understanding

MSEs Micro and Small Enterprises

MV Market Value

NASDAQ National Association of Securities Dealers Automated Quotation System

NBFC Non-bank Financial Companies

NRI Non Resident Indian

NSDL National Securities Depository Limited

NYSE New York Stock Exchange

OCB Overseas Corporate Body

OECD Organisation for Economic Co-operation and Development

RBI Reserve Bank of India

ROA Return on Assets

ROSCs Report on the Observance of Standards and Codes

RTI Right to Information

SARFAESI Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest

SAT Securities Appellate Tribunal

Acronyms and Indian Numerals Used

iv

SCRA Securities Contracts (Regulation) Act

SEBI Securities and Exchange Board of India

SEC Securities Exchange Commission

SICA Sick Industrial Companies (Special Provisions) Act

SMED Micro, Small and Medium Enterprises Development

SOX Sarbanes-Oxley Act

UTI Unit Trust of India

INDIAN NUMERAL TERMS USED

1 Crore = 100 Lakh = 10 Million

Contents

v

CONTENTS Chapter

Page

Preface Acknowledgement i Acronyms and Indian Numerals used ii List of Tables vii List of Boxes ix List of Charts x Executive Summary 1

Chapter 1: Introduction

11-52

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

The Concept of Corporate Governance The Importance of Good Corporate Governance Review of Literature 1.3.1 Institutional Framework and Corporate Governance 1.3.2 Ownership Structure and its Concentration 1.3.3 Effect of Ownership Structure on Performance and Corporate Governance 1.3.4 Methodological Observations Need and Significance of the Study Objectives of the Study Research Design 1.6.1 Data Sources and Sample Selection 1.6.2 Key Variables 1.6.3 Hypotheses 1.6.4 Data Analyses Limitations of the Study Plan of the Study

12 16 18 18 21 24 27 37 38 39 39 40 46 48 51 51

Chapter 2: The Legal and Regulatory Framework Concerning CorporateGovernance in India

53-81

2.1 2.2 2.3

Assessment of the Institutional Framework 2.1.1 Companies Act, 1956 2.1.2 Securities and Exchange Board of India (SEBI) Act, 1992 2.1.3 Securities Contracts (Regulation) Act, 1956 2.1.4 Sick Industrial Companies (Special Provisions) Act, 1985 2.1.5 Listing Agreement Governance Reforms in India 2.2.1 Historical Influences on the Current Corporate Governance System 2.2.2 Recent Developments in Corporate Governance Corporate Governance Reforms: Empirical Evidence 2.3.1 Evaluation of Governance Initiatives

55 59 60 62 62 64 65 65 66 74 74

Contents

vi

2.4

2.3.2 Degree of Compliance Conclusion

77 80

Chapter 3: The Structure of Corporate Ownership and its Concentration

82-98

3.1 3.2

Results and Analysis 3.1.1 The Structure of Corporate Ownership 3.1.2 The Ownership Concentration Discussion and Conclusion

85 85 91 95

Chapter 4: Effects of Ownership Structure on Corporate Governance andPerformance

99-139

4.1 4.2

Results and Analysis 4.1.1 Descriptive Statistics 4.1.2 Results of Ownership Structure and Performance 4.1.3 Results of Ownership Structure and Governance 4.1.4 Results of Ownership Concentration and Performance 4.1.5 Results of Ownership Structure, Corporate Governance and Performance Discussion and Conclusion

101 101 103 112 123 127 137

Chapter 5: Conclusion and Recommendations

140-153

5.1 5.2 5.3

Key Empirical Findings 5.1.1 The Legal and Regulatory Framework Concerning Corporate Governance in India 5.1.2 The Structure of Corporate Ownership and its Concentration 5.1.3 Effects of Ownership Structure on Corporate Governance and Performance Implications and Suggestions Prospects for Future Research

143

144 145 148 149 153

Bibliography 154-173

Appendix I Data Structure of BSE-200 Companies 174

Appendix II Data Structure of Sample Companies (FY 2003-2004 to FY 2005-2006)

179

Appendix III Clause 35 of the Listing Agreement 182

Appendix IV Clause 40A of the Listing Agreement 186

Appendix V Summary of Rotated Factor Loadings on Variables (N=117) 191

Appendix VI Formulation and Promulgation of Regulations by the SEBI 192

Appendix VII Clause 49 of the Listing Agreement 195

Appendix VIII Indian Accounting Standards 209

List of Tables

vii

LIST OF TABLES

Table Description Page

1.1 Summary of Some Prominent Studies Exploring the Relationship

between Ownership Structure, Corporate Governance and Performance

28

2.1 A Comparison of UK/USA Model and the Asian Model 54

2.2 Doing Business in India, 2008 58

2.3 References to BIFR (as on Sept. 30, 2006) 64

2.4 Legal and Regulatory Constraints on Corporate Control 76

3.1 Ownership Structure, 2000-06 86

3.2 Ownership Structure by Industry Type (as of the end of 2006) 87

3.3 Shareholding Pattern 89

3.4 Equity Fractions Held by Large Shareholders, 2000-06 91

3.5 Propensity to Hold Large Equity Stakes 93

3.6 Concentration Indicators 94

4.1 Descriptive Statistics of the Variables entered into Regression Analyses

(N=117)

102

4.2 T-test for Changes in Ownership over Time 102

4.3 Correlations of the Variables entered into Regression Analyses 104

4.4 Ownership Structure and Performance: Cross-sectional Regression

(N=117)

106

4.5 Ownership Structure and Performance: Pooled Regression, 2003-06 108

4.6 Ownership Structure and Performance: Regression Analysis with Single

Ownership at a Time

109

4.7 Ownership Structure and Performance: Regression Results with Two

Years Common Observations

110

4.8 Ownership Structure and Performance: Results of Fixed Effect

Regression for Sub-samples

111

4.9 Ownership Structure and Concentration: Cross-sectional Regression of

(N=117)

113

List of Tables

viii

Table Description Page

4.10 Ownership Structure and Board Size: Cross-sectional Regression of

(N=117)

115

4.11 Ownership Structure and Board Composition: Cross-sectional

Regression of (N=117)

117

4.12 Ownership Structure and Concentration: Pooled Regression, 2003-06 119

4.13 Ownership Structure and Concentration: Results of Fixed Effect

Regression for Sub-samples

122

4.14 Ownership Concentration and Performance: Cross-sectional Regression

(N=117)

123

4.15 Ownership Concentration and Performance: Pooled Regression, 2003-

06

125

4.16 Ownership Concentration and Performance: Results of Fixed Effect

Regression for Sub-sample

126

4.17 Ownership Structure, Corporate Governance and Performance: Cross-

sectional Regression (N=117)

128

4.18 Ownership Structure, Corporate Governance and Performance: Pooled

Regression, 2003-06

130

4.19 Ownership Structure, Corporate Governance and Performance:

Regression Results with Single Governance Measure at a Time

131

4.20 Ownership Structure, Corporate Governance and Performance:

Regression Results with Board Size Categorization

132

4.21 Ownership Structure, Corporate Governance and Performance:

Regression Results with Board Composition Categorization

133

4.22 Descriptives and Results of One Way ANOVA for Comparison of

Means for Board Size Categories

134

4.23 Descriptives and Results of One Way ANOVA for Comparison of

Means for Board Independence Categories

135

List of Tables

ix

LIST OF BOXES

Box Description Page

2.1 Important dates for adoption of Clause 49 of the Listing Agreements 68

List of Charts

x

LIST OF CHARTS Chart Description Page

2.1 Corporate Governance Score of Eight Asian Countries (based on 100%) 75

2.2 Compliance with Clause 49 of Listing Agreement (30 Sept. 2002, BSE

companies)

78

3.1 Ownership Structure for Manufacturing Companies (as of the end of

2006)

87

3.2 Ownership Structure for Service Companies (as of the end of 2006) 88

Executive Summary

1

EXECUTIVE SUMMARY

he corporate governance issues have received considerable attention because of

their apparent importance for the economic health of companies and society at

large especially after plethora of corporate scams and debacles in the recent times. The

U.S., Canada, the U.K., other European Countries, the East Asian countries, and even

India for that matter have witnessed severe strain on their economies together with the

failure of several leading companies in the last two decades or so. This has resulted in

greater emphasis and attention on the corporate governance issues.

In a narrow sense, corporate governance specifies the relationship among various

primary participants (shareholders, directors, and managers) in determining the directions

and performance of corporations. In a broader sense, it delineates the rights and

responsibilities of each primary stakeholder and the design of institutions and

mechanisms that induce or control board directors and management to best serve the

economic interests of shareholders (and other stakeholders) of a company. Many of these

other stakeholders also play a role in monitoring the behaviour of the board/management.

The part of any organization that has the most control over governance is the

board of directors and the board is the ‘soul’ of a company – the foundation of all

business decisions and the origin of corporate culture of the whole entity. The essence or

attributes of good corporate governance include ethics, managerial discipline,

independence, protection of shareholders’ rights, fairness, transparency, board

responsibilities, accountability, and social awareness. One major corporate governance

principle of OECD is to “focus on the company rather than on one group of people.”

T

Executive Summary

2

Most corporate governance rating agencies use some or most of these attributes for

measuring the corporate governance scores on a corporate level.

Theoretical and applied work on corporate governance systems point to the

importance of the structure of ownership and control in setting the background for the

corporate governance issues that can arise in reality. Three aspects that need to be

considered are the structure of ownership and its concentration; the instruments of control

and exercise of control. The connection between ownership structure and performance

has been the subject of an important and ongoing debate in the corporate finance

literature. The debate goes back to the Berle and Means (1932) thesis, which suggests

that an inverse correlation should be observed between the diffuseness of shareholdings

and firm performance. Their view has been challenged by Demsetz (1983), who argues

that the ownership structure of a corporation should be thought of as an endogenous

outcome of decisions that reflect the influence of shareholders and of trading on the

market for shares. The empirical studies about the relation between both variables seem

to have yielded conflicting results. Further, it has been observed that the general features

of the legal and regulatory system, and that the historical factors and experiences have

contributed to the current corporate governance system and are still playing an important

role.

Until very recently, studies in corporate governance were almost exclusively

connected with advanced market economies with sophisticated capital markets. Yet the

problem of corporate governance is arguably more serious and important in transitional

and emerging economies. The paucity of knowledge about corporate governance in the

East is a concern, particularly since foreign investment in India has increased

Executive Summary

3

significantly during the past decade. India’s growth rates have been amongst the highest

in the world since its economic reforms in the 1980s. Its market infrastructure has

advanced while corporate governance has progressed faster than in many other emerging

market economies. This growth brings with it an acute need to understand the dynamics

of corporate governance within an international context. An examination of corporate

governance issues especially those concerning ownership structures and performance

could yield important insights into the topic and provide a fresh perspective on what has

become an increasingly international debate.

The legal and regulatory system of a country plays a crucial role in creating an

effective corporate governance mechanism in a country, the development of markets and

economic growth. The regulatory framework of corporate governance consists of the

Companies Act, the Securities and Exchange Board of India (SEBI) Act, 1992, the

Securities Contracts (Regulation) Act, 1956, Sick Industrial Companies (Special

Provisions) Act, 1985 and the Listing Agreement. It is quite evident that the regulatory

bodies in India have advocated comprehensive and rigorous corporate governance

reforms which emphasize the importance of the credibility and integrity of the listed

companies, the responsibilities of minority shareholders, and the necessity for

information disclosure.

Empirical evidence presented in this study underlines the importance of

ownership structure both in terms of distribution and the types of large shareholders for

corporate governance. The ownership structure was mapped out for 134 companies of

BSE 200 Index for six financial years from FY 2000-2001 to FY 2005-2006. Consistent

with some recent studies, the data supports the findings that companies in India, unlike

Executive Summary

4

several other emerging markets, typically maintain their shareholding pattern over time.

This is especially true for the overall proportion of shares held by promoters and non-

promoters.

In India, ownership is concentrated with Indian promoters, thus the traditional

culture of big corporate family owned houses prevail. On an average the Indian

promoters together with persons acting in concert held around 34 percent of the total

outstanding shares from 2001 to 2006. Furthermore, Indian promoters have the highest

stake in 54 percent of all cases, and were also more often than any other owner type the

second, third, fourth and the fifth largest. The foreign promoters held around 12 percent

shareholding for the said period. The ownership structure by industry type for 2006

corroborated a shareholding of 32 percent and 37 percent respectively for manufacturing

and service sector by the Indian promoters in concert with other persons. Additionally,

the proportion of shares held by foreign promoters was significantly less for the service

companies in comparison to the manufacturing companies. Overall, the results reveal that

the management teams of companies under study were primarily monitored by their

promoters.

Although India has a tradition of equity ownership by promoters, a phenomenon

of institutionalization of wealth wherein institutional investors especially foreign

institutional investors are consolidating their holdings is quite apparent from the study.

During the six-year period, the share of foreign institutional investors has phenomenally

increased by 164 percent. This is the outcome of the persistent efforts of the Indian

government to open its markets to trade and investment. In the 1998/99 budget, foreign

institutional investors were allowed for the first time to invest in Indian primary and

Executive Summary

5

secondary markets. The equity caps for foreign portfolio investment are generally

identical to the FDI equity caps, with the exception of a few specific sectors. Foreign

institutional investors tend to operate on the principle of portfolio diversification with

typically no other relation to the company except for their financial investment. In

addition, the share of ‘others’ i.e., shares in transit (NSDL and CDSL), GDR’s, non-

domestic company, international finance corporate, foreign companies, non-promoter

director, trust, foreign national, foreign bank etc. has increased from 3 percent in 2001 to

5 percent in 2006. Evidence shows insignificant shareholding of individuals in the sample

companies. Individual shareholders have no incentive and no capability to monitor and

influence the behaviour of the management. Furthermore, the proportion of outstanding

shares held by banks, insurance companies, and corporate bodies have decreased from

2001 to 2006. In contrast to findings on other emerging economies in Asia, affiliations

with banks and institutions are not a pronounced feature of Indian corporates.

The results highlight that the ownership concentration both in terms of the

fraction of shares held by the largest shareholders and Herfindal index increased for the

average company over the study period. The cumulative holding underlines that on an

average, the two largest owners collectively neared a blocking super-majority and a

coalition of the five largest owners closed to almost a majority. It is, therefore,

contentious as to the extent efforts at improving corporate governance would succeed in

face of high equity stakes in hands of few owners.

Using a data set of 117 publicly listed companies of BSE 200 Index for the FY

2003-2004 to FY 2005-2006, this study has found some interesting relations between

ownership structure (shareholding pattern) and other dimensions of corporate

Executive Summary

6

governance, such as ownership concentration, board size and board composition by

invoking cross-sectional and pooled regression analyses. The current research found

significant positive effect of institutional ownership on company profitability. There is

evidence for the fact that higher promoters’ ownership (both Indian and foreign) leads to

higher corporate performance. The results are further confirmatory to findings regarding

insignificant effect of non-institutional investors on performance. These non-institutional

investors comprise individual investors, bodies corporate and others who constitute

minority class of shareholders. As expected these non-controlling minority shareholders

cannot be expected to wield any influence on the performance of the company. Some of

the control variables had a significant effect on the corporate performance.

The results also highlight the fact that ownership concentration has no significant

influence on company performance. Some authors have argued that if stock ownership is

concentrated, then it is much easier for shareholders to coordinate their actions and

demand information from managers to assess their performance. Increasing the

proportion of independent directors on the board can improve monitoring, but no

significant effect were found for this factor, and thus have no conclusive evidence to

support the effect of monitoring on company performance. Consistent with some recent

studies that have been conducted in the East Asian business context, the present study

found no significant effects of board size and board composition on company

performance.

It is evident that the regulatory bodies of India have proposed comprehensive and

rigorous corporate governance reforms which lay emphasis on the significance of the

credibility and integrity of listed companies, the responsibilities of directors and

Executive Summary

7

management, the protection of minority shareholders, and comprehensive disclosures.

However, there are major gaps and lapses in the implementation of governance rules. The

lax governance environment can be attributed to weak enforcement mechanisms. As

pointed out earlier the development of a corporate governance system by itself would not

deliver every reform goal until and unless related changes are not brought about at the

macro- and micro-levels. Firstly, the Government of India should establish a definite

mandate for each regulatory agency, thereby strengthening the enforcement mechanisms.

Secondly, there is an urgent need to revamp the judicial system so as to deliver fast

justice and increase judicial efficiency. Thirdly, there is also a need to implement more

robust bankruptcy laws so that they are predictable, transparent and affordable. Lastly,

effective government reforms also require determined efforts by government to clamp

down on corruption.

Since India embarked on liberalization in the early 1990s, it has increasingly

integrated into the global economy. A phenomenon of institutionalization of wealth

wherein institutional investors especially foreign institutional investors are consolidating

their holdings is quite apparent from the study. This growth of shareholding is expected

to have a pervasive influence on corporate governance.

Effective corporate governance mechanisms include both internal mechanisms,

such as board of directors and its major committees, and external mechanisms such as

hostile takeover bids, leveraged buyouts, proxy contests, legal protection of minority

shareholders, and the disciplining of managers in the external labour market. The

corporate governance reforms in India have mainly focused on internal governance

mechanisms, emphasizing the responsibilities of directors and management and the

Executive Summary

8

necessity of transparency. There is further absence of the phenomenon of activism by

shareholders as a factor influencing change in corporate governance. The extremely high

ownership concentration makes hostile takeovers and leveraged buyouts unlikely to

occur. So as long as the management can appease the dominant shareholders effective

implementation of governance reforms cannot be expected in India.

The major governance challenge in India is unaddressed conflicts between the

dominant shareholders and the minority shareholders. The findings underline that

promoters (together with persons acting in concert) are dominant shareholders followed

by institutional investors. The individuals were the least significant investor type in terms

of large stakes. Since board derives its power from dominant shareholders, disciplining

the latter by the former is not unfeasible resulting in the ineffectiveness of the board. No

doubt the empirical results put forth inconclusive affect of board composition on

corporate performance. There thus exists a dual challenge of resolving conflict between

not only the shareholders and management but also between dominant shareholders and

minority shareholders.

The study suggests that it is not only the distribution of ownership but also the

types of large shareholders that have a significant impact on performance. There is

evidence that higher promoter (both Indian and foreign) ownership is beneficial to the

company as it improves firm performance and positively affects value. It seems the

ownership structure of Indian companies reduces agency conflicts but can result in self-

seeking behaviour and pursuit of private gains of control. Some of these private benefits

impose no costs on minority shareholders, while others may dilute the value of their

stock. The more important the latter type of benefits is in a particular company, the

Executive Summary

9

greater are the risks that a controlling shareholder will make decisions that will

undermine the value of the firm. Corporate governance policy should therefore aim to

strengthen the non-diluting private benefits and restrict the scope for dilution.

The major part of the debate on corporate governance pertains to board

composition especially board size and independence. Firstly, there is the question of

enhancing the independence of the board of directors. The introduction of independent

directors is an important arrangement in monitoring the effectiveness of board of

directors. The study puts forth inconclusive effect of board independence on corporate

performance. It is therefore imperative to improve effectiveness of independent directors

in monitoring managers especially to strengthen their independence. A major issue,

however, is the limited availability of trained independent directors who are well versed

with the procedures, tasks and responsibilities expected of them. Further, independent

directors have to be motivated to carry out due diligence by making their liabilities

credible. Secondly, regarding the board size, the study recommends smaller boards.

Rather than having a large number of board members, it is suggested to bring in a few

with the required expertise and knowledge to efficiently run the company.

Notwithstanding the limitations, the study is relevant and timely given the

increasing importance of corporate governance across the globe in general and India in

specific. The findings provide researchers and others valuable understanding regarding

the effect of differences in the shareholding pattern on governance and performance.

Given the certain contradictory results presented in the present study and certain prior

studies using Indian data, it is evident that there are many issues relating to the

relationship amongst ownership structure, corporate governance and performance, which

Executive Summary

10

remain unresolved. Future studies may further explore into other governance-specific

variables (for example, CEO duality, board skill, etc.) and their relationship with

performance.

Many recent studies have suggested that national culture may have a significant

effect on corporate behaviour and performance. Therefore, studying the effects of culture

on corporate governance can provide interesting and reliable information enabling better

understanding of governance issues in India. It may be then feasible for the field to

contribute ideas to improve the confidence and wellbeing of investors at large.

Introduction

11

Chapter 1

INTRODUCTION

he continued transformation of Indian financial sector into a sophisticated, diverse

and resilient system has been the culmination of extensive, well sequenced and

coordinated policy measures consequent to the liberalization, privatization and

globalization since the early 1990s. Around the same time, India’s capital markets began

to stage extensive changes. The Securities and Exchange Board of India (SEBI) was

established in 1992 with a mandate to protect investors and usher improvements into the

microstructure of capital markets. In fact, on almost all the operational and systemic risk

management parameters, settlement system, disclosures, accounting standards, the Indian

capital markets are at par with the global standards (Bajpai, 2004). These positive

dynamics have led to a sustained surge in India’s capital markets.

India has had a well established regulatory framework for more than four decades,

which forms the foundation of the corporate governance system in India. SEBI, vide its

circular dated February 21, 2000, specified principles of corporate governance and

introduced a new clause 49 in the listing agreement of the stock exchanges. The revised

clause 49 as it stands today is applicable to all the listed companies in India. The SEBI, in

designing corporate governance norms, has made considerable effort to take the best

practices in leading equity markets. Additionally, numerous initiatives have been taken

by SEBI to enhance corporate governance practices, viz., streamlining of the disclosure,

investor protection guidelines, book building, entry norms, listing agreement, preferential

allotment disclosures and lot more.

T

Introduction

12

Theoretical and applied work on corporate governance systems point to the

importance of the structure of ownership and control in setting the background for the

corporate governance issues that can arise in reality. Three aspects that need to be

considered are the structure of ownership and its concentration; the instruments of control

and exercise of control (OECD, 2006). The connection between ownership structure and

performance has been the subject of an important and ongoing debate in the corporate

finance literature. The debate goes back to the Berle and Means (1932) thesis, which

suggests that an inverse correlation should be observed between the diffuseness of

shareholdings and firm performance. Their view has been challenged by Demsetz (1983),

who argues that the ownership structure of a corporation should be thought of as an

endogenous outcome of decisions that reflect the influence of shareholders and of trading

on the market for shares. The empirical studies about the relation between both variables

seem to have yielded conflicting results. Further, it has been observed that the general

features of the legal and regulatory system, and that the historical factors and experiences

have contributed to the current corporate governance system and are still playing an

important role.

1.1 The Concept of Corporate Governance

In a narrow sense, corporate governance specifies the relationship among various primary

participants (shareholders, directors, and managers) in determining the directions and

performance of corporations. In a broader sense, it delineates the rights and

responsibilities of each primary stakeholder and the design of institutions and

mechanisms that induce or control board directors and management to best serve the

Introduction

13

economic interests of shareholders (and other stakeholders) of a company. Many of these

other stakeholders also play a role in monitoring the behaviour of the board/management.

The part of any organization that has the most control over governance is the board of

directors and the board is the ‘soul’ of a company – the foundation of all business

decisions and the origin of corporate culture of the whole entity. The essence or attributes

of good corporate governance include ethics, managerial discipline, independence,

protection of shareholders’ rights, fairness, transparency, board responsibilities,

accountability, and social awareness. One major corporate governance principle of

OECD is to “focus on the company rather than on one group of people.” Most corporate

governance rating agencies use some or most of these attributes for measuring the

corporate governance scores on a corporate level.

Our knowledge of corporate governance today is largely derived from the agency

theory that was developed in the West. Governance problems in the West often originate

from the problem of the separation of ownership and control within a business

organization, which gives rise to information asymmetry, incomplete contacts and

subsequent agency costs for reducing conflicts between principal (owners who bear the

residual risks) and agents (board/management) (Fama and Jensen, 1983). Corporate

governance is concerned with ‘shareholder democracy’, with agent (board) elected by

and accountable to principals (shareholders), and the firm operated in a transparent

fashion in the principal’s best interest. Good corporate governance should provide proper

mechanisms for monitoring of management by the board and monitoring of the board by

shareholders.

Introduction

14

Currently, the main agency problem in the United States and the United Kingdom

is between the management/board and outside diverse shareholders where the former

pursue private benefits at the cost of their shareholders’ interests. In continental Europe

and Japan, ownership concentration by main banks and financial institutions is greater. In

East Asian markets with concentrated ownership by controlling families, controlling

shareholders are able to pursue self-interests via unchecked insider or connected party

transactions or abuses of corporate assets and the main conflict is between the major

owners/directors and minority shareholders. However, in India the main agency problem

is multi-parties: controlling state shareholders, directors/supervisors, managers and

outside minority shareholders. Therefore, protection of the rights of minority

shareholders is one of the key concerns.

There are four major sources of forces directly shaping a company’s corporate

governance: (1) individual ethics and corporate cultures, (2) internal ownership/control

and incentive mechanisms, (3) market and external monitoring mechanisms, and (4) laws

and regulations and their enforcement. Clearly, corporate governance is also affected by a

firm’s institutional environments and its own attributes.

High ethical values can reduce costs to achieve a high corporate governance

standard and make it more sustainable. This relies on companies setting ethical guidelines

and good communication channels with all levels of staff so that the same corporate

values are attained by every member of the organization. Corporate culture does begin

with the personal values of the top management. Unfortunately, one fundamental concern

in India is the low ethical standard in business and the lack of proper corporate culture.

Introduction

15

Good corporate governance at least includes all the means and mechanisms that

can be voluntary undertaken by primary participants of a company to provide assurance

to stakeholders that they are recognized and protected. These mechanisms also help

allocate residual rights of control among primary participants of a company. For instance,

shareholders are provided the voting rights in certain key business issues in order to align

residual risk bearing and control. Further, the actions of directors/managers need to be

properly monitored by shareholders or their representatives such as independent non-

executive directors. Such monitoring is based on full and timely disclosures,

transparency, and other internal checks and balances. Incentive schemes such as cash

bonuses and stock options are also used as means of aligning managerial and shareholder

interests (Jensen and Meckling, 1976; and Fama and Jensen, 1983).

The amount of public laws and regulations that a country needs depends to some

extent on the strength of other basic institutions and mechanisms. In theory, corporations

support the free market, with little interference form government as possible. To some

extent, the fair market competition can take care of some corporate governance issues.

Companies are always in a better position to cope with rapid environment changes, and a

‘voluntary approach’ to corporate governance is always preferable to a ‘regulatory

approach’. Public laws would exist only as a kind of floor or backstop to establish

minimum standards, permitting maximum flexibility for the corporation and its

constituents to devise optimal arrangements between them. Government should educate

and persuade companies to incorporate good elements of corporate governance and

implement changes, but leave the final decisions on a number of initiatives up to them.

They should make all new and old corporate governance mechanisms to operate freely,

Introduction

16

without imposing restrictions on a particular mechanism. However, it must be noted that

no matter how comprehensive and strict in a legal system, it cannot avoid all

inappropriate, unethical, and illegal practices.

Hill (1999) argues that no one single mechanism is a governance panacea and

suggests that ‘it is desirable to have a system of overlapping checks and balances’.

Further, it is the spirit and substance and not the form of good corporate governance

which will make an impact.

1.2 The Importance of Good Corporate Governance The OECD Principles of Corporate Governance emphasizes that good corporate

governance is important in building market confidence and encouraging more stable, long

term international investment flows. Empirical evidence has shown that firms which

practice good corporate governance enjoy lower costs of capital (Chen et al., 2001) and

higher share values (Gill, 2002; McKinsey, 2001; and Dallas, 2002). Improvements in

corporate governance can raise the value of companies anywhere, but for American and

British firms the likely benefit is less than 20 percent, whereas for Indonesian and Thai

companies it is closer to 30 percent (The Economist, 2001). Recent research on corporate

governance by Standard and Poor’s indicates that investors are willing to pay a premium

for shares in well-governed companies (Dallas, 2002). The size of the premium for well

governed companies varied by market, from 11 percent for Canadian companies to

around 40 percent for companies where the regulatory backdrop was least certain (those

in Morocco, Egypt and Russia).

The investment bank, Credit Lyonnais Securities Asia’s (CLSA) research findings

also show that corporate governance pays when investing in emerging markets, and there

Introduction

17

is a strong correlation between higher corporate governance rankings and superior

financial return indicators, higher valuations, and medium-term share price out-

performance (Gill, 2002). Low corporate governance companies are high investment

risks, and markets and stocks with poor corporate governance are punished. According to

CLSA (2003), over the last five years, the share price performance of the top 30 Asian

companies (in term of corporate governance scores) was much better than the group of

bottom firms. The share prices of the lowest ranked group were behind the market. They

found that the relationship between corporate governance scores and share price

performance was more significant in countries with a lower rating.

La Porta et al (2002) found that a country’s legal protection of minority

shareholders (a proxy for corporate governance) has a high association with its stock

market size and maturity. There is a strong association between corporate governance and

public governance (proxied by quality of legal system, level of corruption and

transparency). In a government-led, centralized economy, public governance’s impact on

corporate governance is more dominant than vice-versa. This shows that corporate

governance is more than business issues affecting individual firm performance and the

protection of the interests of shareholders, it also has far reaching economic, social and

political implications. Good corporate governance promotes a more open, free, orderly,

transparent and uncorrupted society.

Therefore, all these findings provide sound testimony as to the increasing

importance of corporate governance. Other research has also suggested robust

correlations between corporate governance and key financial indicators. Most investment

managers believe that companies with better governance have better growth prospects,

Introduction

18

are less vulnerable to market downturns, and have lower costs of borrowing (Chow,

2002).

Although good governance may not guarantee better performance in a company,

there is empirical evidence that bad corporate governance is a good early warning of

deeper trouble. In the 1990s, takeovers, corporate collapses, scandals, and the emergence

of institutional investor activism in the West have all led to a serious assessment of how

companies should be directed and governed in the future.

Improving corporate governance is an issue of critical importance to India today

and in its future developments. The Indian government has realized that good corporate

governance is necessary to improve corporate competitiveness and to attract international

capital. It is believed that with better corporate governance, listed firms can reduce

agency costs, become more competitive in global markets, and fulfill their social

responsibilities.

1.3 Review of Literature

A plethora of western and Indian empirical investigations have explored one or more

facets of psycho-socio-economic-demographic preferences of the investors. However, we

provide a highly summarized review of a few but probably some of the most relevant and

important ones from the perspective of the present empirical study.

1.3.1 Institutional Framework and Corporate Governance

The rapidly growing law and finance literature has established that a country’s overall

legal environment, and level of investor protection, correlates with outcomes in securities

Introduction

19

markets, including equity market size/GDP, number of IPOs, ownership concentration,

and dividend policy. 1

With regard to specific legal reforms, a few papers have examined U.S. legislative

actions, typically seeking to limit takeovers. For example, Netter and Mitchell (1989)

scrutinized whether an aborted effort to restrict takeovers through tax-law changes

contributed to the 1987 stock market crash. Karpoff and Malatesta (1995) studied

Pennsylvania’s adoption of an extremely strong anti-takeover law. Both have found

negative share price reactions to restrictions on takeover activity. Greenstone et al. (2005)

reported that the 1964 extension of mandatory disclosure requirements to large NASDAQ

firms predicted positive returns to firms that had not previously voluntarily met the

disclosure requirements. Ferrell (2004) reported that this extension reduced share price

volatility. Litvak (2007) studied market reaction to the adoption of Sarbanes-Oxley Act

(SOX), and found a negative reaction of cross-listed companies subject to SOX,

compared to control group of non-cross listed companies and cross-listed companies not

subject to SOX, from the same country. The reaction was more negative for already high-

disclosing firms, and less negative for faster growing firms. Smith (2007) found similar

results. However, these studies are of limited relevance outside the U.S., because most

firms have controlling owners and hostile takeovers are rare.

In non-U.S. settings, Black et al. (2006a & b) reported that 2001 Korean

governance reforms, which applied only to large public firms, predicted higher market

values for these firms compared to smaller public firms. Atanasov et al. (2007) found that

the Bulgarian reforms restricting financial tunneling in 2002 improved share prices for

1 See for example, La Porta et al., 2000; Shleifer and Wolfenson, 2002; Doidge et al., 2004; Durnev and Kim, 2005; and La Porta et al., 2006.

Introduction

20

firms which faced high tunneling risk. Nenova (2005) reported that Brazilian legal

changes weakened takeover rights on a change of control. It resulted in an increased

value of control as a fraction of firm value and a subsequent restoration of these rights

reduced the value of control back to its original level.

Several Indian studies have examined the overall country’s institutional

framework in context of corporate governance reforms.2 There has also been considerable

exploration of various aspects of governance, namely ownership structures, board of

directors, shareholders rights and compensation.3

At the national level, however, the number of empirical evidence pertaining to the

effect of promulgation of corporate governance norms has been limited. Bhattacharyya

and Rao (2005) examined whether adoption of Clause 49 predicts lower volatility and

returns for large Indian firms. They compared a one-year period after adoption to a

similar period before adoption. The logic being that Clause 49 should improve disclosure

and thus reduce information asymmetry and thereby reduce share price volatility. The

authors found insignificant results for volatility (volatility are lower post-adoption for

both large and small firms, by similar amounts), and mixed results for returns (post-

adoption returns were lower for the largest firms, but positive for a second set of large

firms which were also subject to Clause 49. Black and Khanna (2007) found that the May

1999 announcement by Indian securities regulators of plans to adopt what became Clause

49 was accompanied by a 4 percent increase in the price of large firms over a two-day

2 See for example, Goswami (2000, 2002); Khanna and Palepu (2001); Reed (2002); Reddy (2002); Bose (2005); Sarkar and Sarkar (2005); Chakrabarti et al. (2007); and Rajagopalan and Zhang (2007). 3 See for example, Varma (1997); Chibber and Majumdar (1998, 1999); Khanna and Palepu (2000); Ramaswamy et al. (2000, 2002); Sarkar and Sarkar (2000); Ramaswamy (2001); Bertrand et al. (2002); Douma et al. (2002); Mohanty (2002); Patibandla (2002); Sarkar and Sarkar (2003); Kumar (2004); Phani et al. (2004); Sarkar and Sarkar (2005); Selarka (2005); World Bank (2005); Ghosh (2006); Gollakota and Gupta (2006); Jayati et al. (2006); Rao and Guha (2006); Fagernas (2007); Garg (2007); Kali and Sarkar (2007); Mittal and Kansal (2007); Phani et al. (2007); and Bhasin (2008).

Introduction

21

event window, relative to smaller public firms; the difference grew to 7 percent over a

five-day event window and 10 percent over a two-week window. Mid-sized firms had an

intermediate reaction. The positive reaction of large Indian firms contrasts with the mixed

reaction to the Sarbanes-Oxley Act (which is similar to Clause 49 in important respects),

suggested that the value of mandatory governance rules may depend on a country’s prior

institutional environment. Dharmapala and Khanna (2008) used a large sample of over

4000 firms over 1998-2006 to reveal a large and statistically significant positive effect of

the Clause 49 reforms in combination with the 2004 sanctions.

Although the evidence is sometimes mixed, there are indicators from the literature

both international and national that the legal and regulatory changes have a profound

effect on the value of companies and determine the realpolitik of companies in a

jurisdiction.

1.3.2 Ownership Structure and its Concentration

Theoretical and applied work on corporate governance points to the importance of

ownership structure for corporate governance and documents that changes in corporate

ownership can trigger changes in corporate governance structure (Jensen and Meckling,

1976; Grossman and Hart, 1980, Davis and Thompson, 1994; and Li, 1994). A

burgeoning empirical research shows that share ownership and its structure can be

important sources of incentives for managers, boards of directors and outside

shareholders (Milgrom and Roberts, 1992). The pattern and amount of stock ownership

can also influence managerial behaviour (McConnel and Servaes, 1990; Zeckhauser and

Introduction

22

Pound, 1990; and Maug, 1998), corporate performance4 and stockholder voting patterns

(Grossman and Hart, 1988; Milton and Raviv, 1988; and Gugler, 2001).

Ownership structures have been investigated across many countries. Eisenberg

(1976), Demsetz (1983), Demsetz and Lehn (1985), Shleifer and Vishny (1986), Morck

et al. (1988), and Zwiebel (1995) have shown that even among the largest American

firms there is a modest concentration of ownership. Studies of other developed countries

also discovered more significant concentration of ownership in Canada (Daniels and

MacIntosh, 1991), Germany (Edwards and Fischer, 1994; Gorton and Schmid, 1996; and

Franks and Mayer, 2001), Japan (Berglof and Perotti, 1994; Prowse 1994; and Kang and

Shivdasani, 1995), Italy (Barca, 1995) and seven OECD countries (European Corporate

Governance Network, 1997).

In developing economies, ownership is also heavily concentrated (Blasi and

Shleifer, 1996; Claessens et al., 1996; Claessens, 1997; Xu and Wang, 1997; La Porta et

al., 1998; Yee, 1998; Wiwattanakantang, 1999; Yeh, et al., 2001; and Joh, 2003). There is

evidence of pyramiding and family control of businesses in Asian countries, particularly

India (Bertrand et al., 2002). It is believed that this is a result of the ineffectiveness of the

legal system in protecting property rights. Shareholding patterns in India revealed a

marked level of concentration in the hands of promoters (Khanna and Palepu, 2005; and

Chakrabarti et al., 2008). The average shareholding of promoters in all Indian companies

in 2002 was as high as 48.1 percent (Topalova, 2004). In 2002-03, Sarkar and Sarkar

(2005) found that promoters held 47.74 percent of the shares in a sample of almost 2,500

4 See for example, Demsetz and Lehn (1985); Morck, et al. (1988); Wruck (1989); McConnell and Servaes (1990); Leech and Leahy (1991); Prowse (1992); Jog and Tulpule (1996); Rao and Lee-Sing (1996); Claessens and Djankov (1999); Gorton and Schmid (2000); Demsetz and Villalonga (2001); Claessens et al. (2002); Holderness (2003); Hovey et al. (2003); and Li et al. (2006).

Introduction

23

listed manufacturing companies, 50.78 percent of the shares of group companies and

45.94 percent of stand-alone firms. In comparison, the Indian public’s share amounted to

34.60 percent, 28 percent and 38.51 percent, respectively. Rao and Guha (2006)

established that in nearly half of the listed companies private promoters held majority

stake and suggested that promoter shareholding could still be hidden in the form of other

corporate bodies, individual shareholders and NRI/OCBs.

Recently some new insights about ownership structure have shed some light not

only on the consequences but also on the factors affecting ownership structure, so that it

is increasingly clear that ownership structures vary and that they have an influence on

firm behavior (Shleifer and Vishny, 1997). Based in such different theoretical

frameworks as agency theory or political theory of corporate ownership (Roe, 1991),

ownership structure is supposed to be an outcome of a number of factors, viz., the level

of investors’ risk, the severity of the asymmetric information problems, the uncertainty

involved in assessing managers’ performance, the control preferences of owners and

managers as well as the legal protection of minority shareholders (Lopez-Iturriaga and

Rodriguez-Sanz, 2001). This might explain that ownership concentration is related to a

number of factors, both economic (firm size, profit volatility, government supervision,

owners’ preferences) and system (nation effects, regulation, characteristics of the

financial system, etc.) as pointed by Pedersen and Thomsen (1999).

However, despite these considerable research advances, the theory of optimal

ownership structure still has a number of conceptual and empirical gaps that require

further analysis especially in context of the Indian corporate sector. In this paper we aim

to close some of these gaps and analyze the ownership effects on corporate governance.

Introduction

24

1.3.3 Effect of Ownership Structure on Performance and Corporate Governance

The ambiguity of theoretical predictions concerning the impact of ownership structure on

firm performance is confirmed by the existing empirical evidence. Short (1994) reviewed

the literature pointed out that no conclusions can be drawn about the real effect. Some

authors found a relationship between ownership and firm value or firm performance,

others found no significant relationship. Mc Connel and Servaes (1990), considered both

insider ownership and block holder ownership, found positive but insignificant relation.

Mork et al. (1988) as well as Daily (1995) provided evidence in favor of significant effect

of managerial and institutional shareholding on performance. The results of Nickell et al.

(1997) were inconclusive and pointed out the importance of the type of owner: control by

a financial company improves performance whereas control by a non-financial company

tends to be negatively correlated with productivity growth. Leech and Leahy (1991) did

not get clear-cut results either: they show that the correlation between performance and

concentration depends on the concentration variable chosen. Bianco and Casavola (1999)

observed a negative correlation between ownership concentration and profitability on a

panel of Italian firm. They interpreted this result stressing the importance of selection of

controlling individuals. Similar evidences also exist in the works of Stigler and Fridland

(1983); Agrawal and Knober (1996), Himmelberg et al. (1999), and Chen et al. (2003).

The concentration of ownership may have made control insufficiently contestable.

Zingales (1994) found a positive relation between ownership and performance. It is often

considered (Himmelberg et al., 1999; and De Miquel et al., 2001) that the ambiguity of

the results may be due to two main problems that plague the empirical analysis:

unobservable heterogeneity and potential endogeneity of ownership. Unobservable

Introduction

25

heterogeneity means that there are firm specific characteristics that are difficult to

measure or difficult to obtain and which do not enter the model. If individual

characteristics are not taken into account, the results may be biased.

Ownership structures have also been investigated in non-US settings. Tuschke

and Sanders (2003) studied German firms, which are typically characterized by large and

powerful external owners. In such a context, the firm might be more likely to adopt

corporate governance reforms as a function of external ownership pressure. In addition,

the researchers also found that reforms affect managers’ strategic decisions, enhancing

market performance. These study findings are consistent with those of Durand and

Vargas (2003), who relying, on privately held French firms, found that ownership

controlled firms are more efficient than those run by professional managers. Chen et al.

(2003) documents that managerial shareholding has a linear significant impact on

Japanese firm performance.

The transition economics literature is particularly rich in attempts to identify the

impact of ownership and privatization on firm performance (Carlin et al., 1995; Carlin,

1999; and Djankov and Murrell, 2000). The studies that take into account the problem of

the selection bias find that privatization brings about significant and positive change in

firms’ behaviour particularly in Central and Eastern Europe (Frydman et al., 1999; and

Grosfeld and Nivet, 1999). Lemmon and Lins (2003) demonstrated that during East

Asian financial crisis of 1997-98, shareholder value declined more significantly in East

Asian firms in which managers had effective control. Li et al. (2006) indicated that

institutional ownership exerted a direct and significant influence on corporate governance

Introduction

26

in areas such as board composition, CEO duality, leadership diversity, and ownership

concentration.

With the onset of liberalization process, the monitoring of corporations became

one of the important issues addressed in corporate governance literature in India. Chibber

and Majumdar (1998), using industry level survey data for 1973-89 compared

performance of state-owned enterprises, mixed-enterprises, and private corporations,

using data for 1973-89. They document that efficiency scores for private firms were

significantly higher than for state-owned enterprises and mixed-enterprises. Chibber and

Majumdar (1998, 1999) examined the influence of foreign ownership on performance of

firms operating in India using accounting measures of performance in cross sectional data

analysis. They found foreign ownership to have a positive and significant influence on

various dimensions of firm performance, but it does so, only when it crosses a certain

threshold limit, which is defined by the property rights regime. Sarkar and Sarkar (2000)

used firm level balance sheet data for 1995-96, provided evidence on the role of large

shareholders in monitoring company value. They found that block-holdings by directors’

increases company value after a certain level of holdings. However, they did not obtain

any evidence of active governance from institutional investors. They also highlight that

foreign equity ownership had a beneficial effect on company value. Khanna and Palepu

(2000), using business group level Indian data from 1993, found that firm performance

initially declined with group diversification and subsequently increased once group

diversification exceeded a certain level. Gupta (2001), using firm level data of

government owned firms from 1993-98, documented that privatization and competition

had a complementary impact on firm performance. Patibandla (2002), using firm level

data from 1989 to 1999, showed that foreign ownership was positively related with the

firm performance, without accounting for unobserved firm heterogeneity. Douma et al.

Introduction

27

(2002), examined how ownership structure, namely the differential role played by foreign

individual investors and foreign corporate shareholders affect the firm performance,

using firm level data for 2002 from India. They found foreign corporations attributed to

positive effect on firm performance. They also document positive influence of domestic

corporate shareholding on firm performance. Kumar (2004) examined empirically the

relationship between the ownership structure and firm performance using a panel of

Indian corporate firms over 1994-2000 and found that foreign shareholding pattern did

not influence the firm performance significantly. Pattanayak (2008) examined the effect

of insider ownership on corporate value in India for the period of 2000-01 to 2003-04,

using 1,833 BSE listed firms. The paper provided scientific evidence that the link

between insider shareholding and firm value was non-linear in nature. The other finding

of significance was that foreign promoter/collaborator shareholding has a positive impact

on firm value.

Table 1.1 presents a summary of some of the prominent national and international

studies on the relationship between ownership structure, corporate governance and

performance.

1.3.4 Methodological Observations

a. Method of Investigation

A number of previously published researches thus confirm ever-increasing attention in

the international and national literature, in general to various dimensions of investments.

Various statistical tools varying from computation of basic statistical measures such as

those of location, variability, skew ness and kurtosis; to rigorous statistical framework

Introduction

28

Table 1.1: Summary of Some Prominent Studies Exploring the Relationship between Ownership Structure, Corporate

Governance and Performance

Author(s)

Ownership

variables(s) Performance variable(s)

Other variable(s) Statistical methods

Main results

Agrawal and Knoeber (1996)

1) % insider ownership by directors and officers. 2) Dummy for presence of founding CEO. 3) % of shares held by above 5% blockholders.

Tobin's Q by market value of stock, preferred stock and debt to book value of assets.

1) Size. 2) Standard deviation of stock return. 3) Dummy for regulated firms. 4) Years of CEO tenure. 5) Number of officers and directors. 6) R&D to assets. 7) Number of institutional shareholders. 8) Dummy for NYSE listing. 9) Firm diversification. 10) Number of outside CEO job opportunities. 11) Cash flow return. 12) Control activity by % of acquired firms in each two-digit SIC. 13) Advertising/assets.

OLS and 2SLS regression.

Tobin's Q decreases significantly with board outsiders, leverage, and corporate control activity. Shareholdings by blockholders and institutional investors increase significantly by corporate control activity. Institutional ownership decreases significantly with blockholder ownership and vice versa.

Chen (2001) Five ownership categories: FSOS, FSOIS, FDIS, FMOS, and FTS.

Tobin’s Q. 1) Firm Age. 2) Debt/equity ratio. 3) Growth. 4) Firm size. 5) Stability. 6) ROA. 7) Ownership concentration (T1 and T10).

OLS regression.

A strong relation between ownership concentration and corporate performance found. While shares held by state play a negative role in corporate governance, domestic institutional and managerial shareholding improve the firm’s performance.

Curcio (1994) 1) Combined equity or voting ownership by members of the board in the ranges: (0-5%), (5-25%), and (25-100%). 2) Equity or voting ownership by the board of directors. 3) Disparity between board stock and voting ownership.

1) Tobin’s Q. 2) Total factor productivity growth or real value added by employee remuneration plus interest payments, depreciation, amortization and profits.

1) Log of average hours worked. 2) Log of capital stock. 3) Log of average hours worked. 4) Time. 5) Industry. 6) Market share and its growth. 7) Market share by 5 largest firms. 8) Import penetration. 9) Leverage and its growth. 10) Small firm dummy. 11) Union density.

OLS regression and heteroscedasticity consistent technique.

Profitability is significantly decreasing with board ownership in the (25-100%) range with regard to Tobin’s Q. Profitability is significantly decreasing with the disparity between equity and voting ownership both with regard to Tobin’s Q and productivity growth.

Demsetz and Lehn (1985)

1) Log of a Herfindal index. 2) Log of combined holding by 5 largest shareholders. 3) Log of holding by 20 largest shareholders. 4) Holdings by 5 largest families and individuals. 5) Holdings by 5 largest institutional investors.

1) Return on equity. 2) Standard error of market model regressing firm return on market return.

1) Firm size by market value of equity 2) Standard deviation of stock return. 3) Standard deviation of accounting return on equity. 4) Industry dummies for utilities, financials and media. 5) Capital expenditure / total sales. 6) Advertising / total sales. 7) Research & development / total sales.

OLS regression.

Performance by accounting return is insignificantly decreasing with ownership by 5 or 20 largest shareholders or the Herfindal index. Ownership by 5 or 20 largest shareholders increases significantly by standard error of market return.

Contd…

Introduction

29

Author(s)

Ownership

variables(s) Performance variable(s)

Other variable(s) Statistical methods

Main results

Elliot (1972) MC ≤5% single block of voting control. OC ≥10% and evidence of active control, or, ≥20%.

1) Change in sales. 2) Change in assets. 3) Dividends. 4) Return on stocks. 5) Profits. 6) Return on equity. 7) Growth in spending.

1) Stock of liquid assets. 2) Cash flow. 3) Debt/Equity. 4) Non-equity financed assets. 5) Discretionary income. 6) Capital expenditure/Net plant assets. 7) Size by sales. 8) Growth in sales.

Variance analysis.

No significant effects between OC and MC except with regard to change in cash flow.

Hermalin and Weisback (1991)

Combined stock ownership by present CEO and all former CEOs still on the board in the ranges (0-1%), (1-5%), (5-20%), and (20-100%).

1) Tobin’s Q. 2) Return on assets.

1) Industry type. 2) Firm Size. 3) R&D costs to size. 4) Advertising to size. 5) Proportion of outside directors on the board 6) Tenure by CEO 7) Median tenure of inside or outside directors on the board. 8) Dummy for family relation between any two board members.

OLS regression.

Performance increases significantly with CEO ownership in the (0-1%) range and decreases significantly in the (1-5%) range.

Himmelberg, et al. (1999)

1) Percentage of common equity holdings by all top-level managers. 2) Average percentage of equity ownership per top-level managers.

1) Tobin’s Q 2) Return on assets.

1) Standard deviation of stock return. 2) Firm size. 3) Capital expenditures to capital stock. 4) R&D to capital. 5) Advertising to capital. 6) Free cash flow by operating income to sales. 7) Capital to sales ratio and this ratio squared. 8) Time and industry dummies. 9) Managerial ownership. 10) A vector of variables equal to the owner determinants mentioned above.

OLS regression.

Find some evidence of a roof-shaped relation. But after controlling for firm characteristics and firm fixed effects they find no relation between managerial ownership and performance even for sub-samples of large and small firms.

Kumar (2004) 1) Managerial shareholding. 2) Institutional investors. 3) Foreign investors. 4) Corporate shareholding

1) ROA. 2) ROE. 3) MBVR. 4) PQ ratio.

1) Age. 2) Capital intensity. 3) R&D intensity. 4) Export intensity. 5) Import intensity. 6) Tax intensity. 7) Debt intensity.

OLS regression.

Foreign shareholding pattern does not influence the firm performance significantly. Financial institutions monitor the firm once they have at least 15% equity stakes. The shareholding by the directors also influences the performance of the firm, beyond a certain threshold.

Leach and Leahy (1991)

1) Five ownership concentration indices 2) Six control type indices for management control (MC) or owners control (OC).

1) Historic market value / ordinary share capital. 2) Return on sales 3) Return on equity.

1) Size 2) Product diversification 3) Export intensity of sales. 4) Capital/labor ratio. 5) Age of firm. 6) Beta risk. 7) Standard deviation of return. 8) Industry. 9) Sales growth. 10) Asset growth. 11) Salary of highest paid director.

Multivariate regression.

OC firms are significantly (weak) more ‘profitable’ than MC firms with regard to return on equity, return on sales, growth of sales and growth of net assets. More concentration caused significantly less performance in terms of historic market value/ ordinary share capital and return on sales.

Contd…

Introduction

30

Author(s)

Ownership

variables(s) Performance variable(s)

Other variable(s) Statistical methods

Main results

Lee (2008) The percentage of shares controlled by controlling shareholders, foreign investors and institutional investors.

1) Net income to total assets. 2) Ordinary income to total assets. 3) Tobin’s Q

9 1) Firm size. 2) Leverage. 3) Liquidity. 4) Risk. 5) Business cycle. 6) Industry. 7) Ownership concentration.

Multivariate regression analyses, PCA.

Firm performance improves as ownership concentration increases. The effects of foreign ownership and institutional ownership are not significant.

Li et al. (2006) The percentage of shares controlled by public and government

1) Short-term ROA. 2) Manager compensation to profit

1) Family ownership. 2) Firm size. 3) Firm age. 4) Ownership concentration. 5) Institutional ownership. 6) CEO duality. 7) Profit fluctuation. 8) Board composition. 9) Leadership diversity.

Partial least-squares approach

Institutional ownership exerts a direct and significant influence in areas like board composition, CEO duality, leadership diversity, and ownership concentration. Institutional ownership has only indirect effect on firm performance.

McConnell and Servaes (1990)

1) Insider stock ownership by managers and directors. 2) Institutional ownership. 3) Blockholders as combined ownership by non-insiders who have more than 5% ownership. 4) Largest single blockholder. 5) Dummy for presence of blockholders. 6) Insiders plus all blockholders. 7) Insider ownership in the ranges: (0-5%), (5-25%), and (25-100%). 8) Insiders plus all blockholders in the ranges: (0-5%), (5-25%), and (25-100%).

1) Tobin’s Q 2) ROA 1) For a limited set of tests industry has been accounted for by subtracting average industry differences in Tobin’s Q from each observation of Tobin’s Q. 2) Size by replacement cost of assets. 3) R&D costs to size. 4) Advertising to size. 5) Long-term debt to size.

OLS regression.

Both measures of profitability are significantly increasing with ownership by managers and directors, and this relation is significantly roof-shaped with a performance peek for 69% ownership in 1976 and 41% in 1986. Defining ownership as insiders plus all blockholders produce similar results. Performance increases significantly with institutional ownership, but no measure of blockholder ownership seems to have any effect. All control variables are significant. Using piecewise linear regression profitability is significantly increasing for insider ownership in the (0-5%) range.

Monsen et al. (1968)

MC ≤5% single block of voting control. OC ≥10% and evidence of active control, or, ≥20%.

Return on equity. 1) Industry type by major product. 2) Firm Size. 3) Time.

Variance analysis.

OC firms are significantly (strong) more profitable than MC firms. Time and industry type are also significant. Size is not.

Morck et al. (1988)

1) Combined shareholding by all members of the board in the ranges: (0-5%), (5-25%), and (25-100%). 2) Combined shareholding by top two officers. 3) Dummy for presence of founder on board.

1) Tobin’s Q. 2) Profit rate by net cash flow to replacement cost of capital.

1) Size 2) R&D costs to size. 3) Advertising to size. 4) Long-term debt to size. 5) Industry by three-digit SIC.

OLS regression.

Profitability is significantly increasing for board ownership in the (0-5%) range and significantly decreasing in the (5-25%) range and if the founder is present on the board of old firms.

Contd…

Introduction

31

Author(s)

Ownership

variables(s) Performance variable(s)

Other variable(s) Statistical methods

Main results

Murali and Welch (1989)

Closely held firms- > 50% by small group or individual. Widely held firms- All other firms.

1) Adjusted stock market return. 2) Return on assets. 3) Return on equity.

1) Firm Size 2) Capital expenditures to sales. 3) Advertising expenditures to sales. 4) R&D to sales. 5) Standard variation of return on assets and equity.

OLS regression on performance.

No significant difference in performance between closely held and widely held firms. Significant controls: Standard variation on return on assets and equity, and R&D to sales.

Radice (1971) MC ≤5% single block of voting control. OC ≥15%.

Return on equity.

1) Industry by type of major product. 2) Mean growth rate in net assets. 3) Firm Size.

OLS regression.

OC firms are significantly (weak) more profitable than MC firms. Growth is significant. Size and industry are not significant.

Short and Keasey (1999)

The percentage of shares held by directors, institutions and external ownership.

1) Return on equity. 2) Tobin’s Q.

1) Size 2) Growth by sales growth. 3) Leverage by debt to total assets. 4) R&D/ total assets.

Heteroskedasticity corrected OLS regression.

Director ownership and cubic ownership is significantly positive and squared ownership is significantly negative. The polynomial reaches its maximum at 16% and its minimum at 42% ownership.

Thomsen and Pedersen (1998)

Ownership concentration by logistic transformation of percentage voting ownership by largest owner.

Return on equity. 1) Firm Size. 2) Standard deviation of return on equity. 3) Dummy for public utilities. 4) Dummy for media companies. 5) Dummies for nation effects. 6) Dummy for dual class shares. 7) Size of economy by GDP. 8) Capital intensity by assets to sales. 9) Dummy for R&D above 1% of corporate turnover. 10) Stock market capitalization. 11) Bank sector concentration.

OLS regression.

Return on equity is insignificantly decreasing with ownership concentration.

Wruck (1989) 1) Changes in ownership concentration in the ranges (0-5%), (5-25%), and (25-100%) using either board voting stock or combined voting stock by managers, directors and ≥5% block holders. 2) Purchaser is management controlled or not. 3) Purchaser wants control or not.

Five-day cumulative abnormal return, CAR, by the selling firm over the interval (AD-4, AD) where AD is the announcement date.

1) Size 2) R&D costs to size. 3) Advertising to size. 4) Long-term debt to size. 5) Industry by three-digit SIC.

OLS regression.

Profitability is significantly increasing for changes in board voting stock in the (0-5%) range and significantly decreasing in the (5-25%) range. Considering the model using changes in combined voting stock by managers, directors and ≥5% block holders, profitability is significantly decreasing in the (5-25%) range and significantly increasing in the (25-100%) range. If the purchaser wants control the profit decreases.

Contd…

Introduction

32

Author(s)

Ownership

variables(s) Performance variable(s)

Other variable(s) Statistical methods

Main results

Xu and Wang (1997)

The fraction of equity owned by state, legal persons, tradable A-share investors, employees and B-share holders.

1) Market to book value ratio. 2) Return on equity. 3) Return on assets.

1) Firm size. 2) Industry type. 3) Debt/asset ratio. 4) Growth of net income. 5) Concentration ratio (A10 and Herfindal index)

OLS regression.

There is a positive and significant correlation between ownership concentration and profitability. The effect of ownership concentration is stronger for companies dominated by the state. Firm’s profitability is positively correlated with the fraction of legal person shares, but it is either negatively correlated or uncorrelated with the fraction of state shares and tradable A-shares held mostly by individuals. Labor productivity tends to decline as the proportion of state shares increases.

Zeckhauser and Pound (1990)

1) MC ≤15% of cohesive voting stock ownership. 2) OC ≥15% of cohesive voting stock ownership.

Earnings / price ratio. 1) Dividend payout by dividend/earnings. 2) Leverage by debt / debt plus market value of equity. 3) Asset-specificity by R&D / sales.

Standard t-tests are applied.

Among firms with high asset-specificity OC firms have significantly lower E/P ratios than MC firms do. Firms with low asset specificity have no significant E/P difference. No significant difference in dividend or leverage between OC.

Introduction

33

like multiple regression analysis, discriminant analysis and principal component analysis

have been used.

b. Overall Findings and Elucidation

Differences abound across the studies, in measurements and sample used, in estimating

technique applied, in whether and how they account for the endogeneity of ownership

structure, and in results obtained. Meta analysis by Sanchez and Garcia (2007) also

shows that control for endogeneity moderates the effect of ownership on firm

performance. Those studies that do not address the endogeneity problem exhibit the

positive and linear effect, but the effect does not exist in those studies that treat

ownership concentration as an endogenous variable.

Explanations given in the empirical studies to the relationship between ownership

structure, corporate governance and performance were:

1. Reward argument: States that firms reward their managers for good past financial

performance by giving them equity ownership; therefore, better financial

performance causes more management ownership (Kole, 1996).

2. Insider-reward argument: According to Cho (1998) other things being equal,

managers may prefer equity compensation when they expect their firm to perform

well and, consequently, the value of the firm to increase. As a result, higher levels

of insider ownership are expected at firms with high corporate values.

3. Insider-investment argument: Owner-managers are insiders who may capitalize

on their insights by increasing their ownership when they expect the financial

performance to improve and decrease their ownership when they expect the

financial performance to deteriorate (Loderer and Martin, 1997).

Introduction

34

4. Natural selection argument: Any kind of ownership structure is determined by

financial performance in the sense that corporations with inefficient ownership

structures will fail to survive in the long run. Demsetz (1983), Demsetz and Lehn

(1985) as well as Kole and Lehn (1997) have argued for this kind of ownership

structure endogeneity. Note that an implication of this argument is that in the

long-run all ownership structures should be expected to perform equally well.

5. Incentive alignment argument: The nature of a corporation’s ownership structure

will affect the nature of the agency problems between managers and outside

shareholders, and among shareholders. When ownership is diffuse, agency

problems will stem from the conflicts of interest between outside shareholders

and managers who own significant amount of equity in the firm (Jensen and

Meckling, 1976). On the other hand, when ownership is concentrated to the

degree that one owner has effective control of the firm, the nature of the agency

problem shifts away from manager-shareholder conflicts between the controlling

owner (usually the manager) and the minority shareholders. More equity

ownership by the manager may increase corporate performance because it means

better alignment of the monetary incentives between the manager and other equity

owners.

6. Takeover premium argument: More equity ownership by the manager may

increase corporate performance because the managers are more capable of

opposing a takeover threat from the market for corporate control and as a result,

the raiders in this market will have to pay higher takeover premiums (Stulz,

1988).

Introduction

35

7. Entrenchment argument: Gaining effective control of a corporation enables the

controlling owner to determine not just how the company is run, but also how

profits are being shared among shareholders. Although minority shareholders are

entitled to the cash flow rights corresponding to their share of equity ownership,

they face the uncertainty that an entrenched controlling owner may

opportunistically deprive them of their rights. The entrenchment problem created

by the controlling owner is similar to the managerial entrenchment problem

discussed by Morck et al. (1988). Higher managerial ownership may entrench

managers, as they are increasingly less subject to governance by boards of

directors and to the discipline by the market for corporate control. More equity

ownership by the manager may decrease financial performance because managers

with large ownership stakes may be so powerful that they do not have to consider

other stakeholders interest. Separation between ownership rights and control

rights can exacerbate the entrenchment problems raised by concentrated

ownership.

8. Cost of capital argument: Increased ownership concentration (any kind of owner)

decreases financial performance because it raises the firm’s cost of capital as a

result of decreased market liquidity or decreased diversification opportunities on

behalf of the investor (Fama and Jensen, 1983).

9. Stultz's integrated theory: Stultz (1988) presents a formal model that predicts a

roof-shaped relation between managerial ownership and financial performance.

The model is integrating the takeover premium and the entrenchment argument

into a single theory.

Introduction

36

10. Morck et al.'s combined argument: Morck et al. (1988) argued that the

performance effect of the incentive alignment dominates the performance effect

of the entrenchment argument for low levels of managerial ownership. For higher

levels (about 5% managerial ownership) the picture is reversed and for still higher

levels (about 30%) the picture is reversed back once again.

11. Monitoring argument: Large owners or block owners may be more capable of

monitoring and controlling the management thereby perhaps contributing to

corporate performance (Shliefer and Vishny, 1986, 1997).

c. Conclusion

The review of literature shows that researchers have done considerable work on

ownership-governance-performance relation internationally. Most of the studies which

were undertaken in the context of India are at aggregate industry level and structured in

the traditional neo-classical framework where institutional mechanisms have received

scanty attention. Even in many cross-country studies and reviews, India has not featured.5

In the later phase of nineties, some of the scholars have tried to fill this void by entirely

focusing on India. Nevertheless, empirical studies on Indian ownership are few. The

extent of separation between ownership and control is not clear, and the nature and extent

of use of group structures is not known. Hence, there exists a scope for additional

investigations pertaining to the affects of ownership structure on performance of

companies.

5 For example two most cited papers like Shleifer and Vishny (1997) and La porta, Lopez De-Silanes and Shleifer (1999) have not considered India in their study. However, Claessens and Fan (2002) present a review of corporate governance problems in Asia in which they have cited few Indian studies.

Introduction

37

1.4 Need and Significance of the Study

The increased role of the private sector and capital markets worldwide and the increased

global competition for long-term capital are the main reasons for the increased focus on

corporate governance in countries throughout the world. The wide attention paid to

corporate governance over the last few years was further fuelled by the 1997 Asian

financial crisis, and recent corporate scandals and accounting failures around the world.

With the continuous corporatisation of enterprises, the rapid expansion of the security

markets and the ever increasing market awareness, coupled with a series of corporate

scandals and accounting failures recently, corporate governance has become a very

pressing problem in India.

Until very recently, studies in corporate governance were almost exclusively

connected with advanced market economies with sophisticated capital markets. Yet the

problem of corporate governance is arguably more serious and important in transitional

and emerging economies. The paucity of knowledge about corporate governance in the

East is a concern, particularly since foreign investment in India has increased

significantly during the past decade. India’s growth rates have been amongst the highest

in the world since its economic reforms in the 1980s. Its market infrastructure has

advanced while corporate governance has progressed faster than in many other emerging

market economies. This growth brings with it an acute need to understand the dynamics

of corporate governance within an international context. An examination of corporate

governance issues especially those concerning ownership structures and performance

could yield important insights into the topic and provide a fresh perspective on what has

become an increasingly international debate.

Introduction

38

There is growing empirical evidence that changes in corporate ownership can

trigger changes in corporate governance structure (Davis and Thompson, 1994; and Li et

al., 1994) and in firm behaviour and performance (Dalton et al., 1998). However, despite

these studies, some of the effects of ownership structures on corporate governance and

performance remain unclear. Further, research has shown that some dimensions of the

business context, such as the legal environment and industry regulations, may influence

corporate governance and corporate performance (Luoma and Goodstein, 1999). As India

has a unique environment, it is argued that changes on corporate governance in India

should take place within the context of India’s social and business institutions. Relevant

previous empirical findings from India highlight opportunities for future research in this area.

Thus, there is a need to study the ownership-governance-performance relations in an

Indian business context. It is believed that the findings of the study will be of immense

use to academia and the regulators to understand the practice and develop new theories.

1.5 Objectives of the Study

The major objectives of the study are:

1. to critically evaluate the legal and regulatory framework concerning corporate

governance;

2. to examine the structure of corporate ownership and its concentration; and

3. to study effects of ownership structure (shareholding pattern) on corporate

governance and performance.

Introduction

39

1.6 Research Design

This section describes the selection criteria used and the resulting sample of companies. It

also provides details on the construction of the data on ownership structures and provides

definition of key variables. Finally, it describes the methodology used for the empirical

tests that follow.

1.6.1 Data Sources and Sample Selection

The SEBI implemented the recommendations of the Kumar Mangalam Birla Committee

(KMBC) through the enactment of Clause 49 of the Listing Agreements. The terms were

applied to companies in the BSE 200 and S&P CNX Nifty indices, and all newly listed

companies, on March 31, 2001. The analysis has been accordingly confined to all the

companies that are included in the BSE 200 Index6 for six financial years from FY 2000-

2001 to FY 2005-2006. The BSE also has the second largest number of domestic quoted

companies on any stock exchange in the world after NYSE, and more quoted companies

than either the London or the Tokyo stock exchange. The data sources were the Annual

Reports of the companies, corporate database (PROWESS) maintained by the CMIE, the

Center for Monitoring the Indian Economy, and the reports filed by companies with the

BSE as part of the listing requirements.

For the analysis, we took a subset of the above 200 companies. Firstly, we

excluded from the sample all the public sector companies as their performance is

influenced by a large number of social obligations which might have been difficult to

6 The BSE 200 Index was launched on 27th May 1994 to provide a better representation of the increased equity stocks, market capitalisation as also the newly emerged industry groups. The companies under BSE 200 have been selected on the basis of their market capitalisation, volumes of turnover and other fundamental factors. The financial year 1989-90 has been selected as the base year. BSE-200 index is calculated on free-float methodology.

Introduction

40

justify (Appendix IA). Secondly, we kept out all the banking companies since they are

governed by the Banking Regulation Act; hence these companies were different from

those governed by the Companies Act (Appendix IB). Finally, those companies which

were not listed for all the six years under consideration were excluded (Appendix IC).

These sample selection criteria’s resulted in a final sample size of 134 companies, which

accounted for 67 percent of the BSE 200 Index (Appendix ID). The structure of corporate

ownership and its concentration was examined for these 134 companies for the FY 2000-

2001 to FY 2005-2006. The number of companies was further reduced to 117 when

conducting the multivariate tests due to non-availability of complete data for the FY

2003-2004 to FY 2005-2006 (Appendix II).

1.6.2 Key Variables To examine the effect of ownership structure on corporate governance and performance,

the following variables were used:

a. Measurement of Corporate Performance Two measures of performance, as supported in the finance and accounting literature were

chosen for the purpose of analysis.

Tobin’s q (TOBINS_Q). Tobin and Brainard (1968) and Tobin (1969) designed a

measurement of corporate performance, which is equal to the ratio of market value of

equity and debt divided by the replacement costs of total assets. The notion is that

replacement costs are a logical measure of the alternative-use values of the assets. Hence,

unless assets used by firms are able to create at least as much value as the cost of

reproducing them, the assets would be better employed elsewhere. Companies displaying

Introduction

41

Tobin’s q greater than unity are considered to be using scarce resources effectively, while

those with Tobin’s Q less than unity as using resources poorly.

Tobin’s q has been computed as [MV of common stock + BV of preference stock + BV

of borrowings + BV of CL)/ BV of total assets as denoted by FA + INV + CA] with all

values computed at the year end.

Return on assets (ROA). The accounting variable chosen was calculated as the ratio of

operating income (EBIT) to assets. Total assets include value of fixed assets,

investments, and current assets. This measure is independent of company’s capital and

tax structure. The choice was limited to this measure since other measures usually tend to

be highly correlated (Jacobson, 1987).

b. Ownership and Governance Variables The ownership structure and corporate governance mechanisms can influence company

performance. The ownership and governance measures were analyzed as independent

variables.

Ownership structure. The distribution of ownership among different categories of

owners provides useful information about the corporate governance structure of a

company. The shareholding has been classified according to a standard taxonomy of

investors’ categories and definitions as provided under Clause 35 (Appendix III) and 40A

of the Listing Agreement (Appendix IV). The shareholding thus has been classified as

under:

• Indian Promoters (IND_PROM)

• Foreign Promoters (FOR_PROM)

• Persons Acting in Concert (PAC)

Introduction

42

• Institutions (INST)

• Non-Institutions (N_INST)

For the cross-sectional and pooled regression analyses the study considers only

four major groups of ownership viz., Indian promoters, foreign promoters, institutions,

and non-institutions.

Ownership concentration (OWN_CONC). Ownership concentration is a measure of the

distribution of power between major shareholders and dispersed shareholders. It is an

indicator of whether some shareholders can influence company management and whether

control is contestable (OECD, 2006). High ownership concentration is associated with an

active role of shareholders in the management of the company, notably through the

appointment of board members, and with a limited contestability of control. A low

ownership concentration alternatively entails a greater independence of board members

and especially of executive board members from shareholders and, at the same time, a

greater possibility of control changes through takeovers.

Two measures have been used as proxies of ownership concentration. They are:

(i) The fraction of shares held by the largest top three shareholder (T3) and the

largest top five shareholders together (T5); and

(ii) Herfindal index7 of ownership concentration as the sum of squared percentage

of shares controlled by each top three (H3) and five shareholders (H5).

There were at least two reasons for the choice of the top three and top five

shareholders for determining ownership concentration. First, there is enough evidence

7 There is no theoretically superior definition of concentrated ownership. One finding is that the Herfindal index, which reflects the full ownership structure of the firm, performs very well as a proxy of ownership concentration (Bohren and Odegaard, 2000). The index has a maximum of unity (a single investor owns every share) and approaches a minimum of zero as the ownership structure gets increasingly diffuse.

Introduction

43

bearing this choice of proxy for determining the concentration (Classens et al., 1996;

Bohren and Odegaard, 2000; and Chen, 2001). Second, the fact that data for larger

number of shareholders was unavailable for several companies.

Board size (B_SIZE). There is a view that larger boards are better for corporate

performance because they have a range of expertise to help make better decisions and are

harder for a powerful CEO to dominate8. However, recent thinking has leaned towards

smaller boards9. Board size has been measured as the total number of directors on the

board. The board size has been further categorized as follows:

Category 1: if board size was of 4-9 members.

Category 2: if board size was more than 9 members.

Board composition (B_COMP). Though the issue of whether directors should be

insiders or outsiders has been well researched, no clear conclusion has been reached. On

the one hand, inside directors are more familiar with the company’s activities and they

can act as monitors to top management. On the other hand, non-executive directors may

act as professional referees to ensure that competition among insiders stimulates actions

consistent with shareholder value maximization. A number of empirical studies support

the beneficial monitoring and advisory functions to company shareholders10. However,

there are evidences that there is no significant relationship between board composition

and performance11. Board composition has been measured by the proportion of

8 See for example, Drucker (1992), Sparrow (1993), and Cadbury (2000). 9 See for example, Mintzberg (1983), Baysinger and Butler (1985), Kosnik (1990), Lipton and Lorsch (1992), Jensen (1993), and Eisenberg et al. (1998) 10 See for example, Fama (1980), Baysinger and Butler (1985), Rosenstein and Wyatt (1990), and Byrd and Hickman (1992) and Abor and Biekpe (2007). 11 See for example, Fosberg (1989), Hermalin and Weisbach (1991), Yermack (1996), and Bhagat and Black (2002).

Introduction

44

independent directors to total directors on the board. The board independence was

categorized as follows:

Category 1: where the proportion of independent directors with respect to the total board

size was less than 50 percent.

Category 2: where the proportion of independent directors with respect to the total board

size was greater than 50 percent.

c. Control Variables In order to control for the other possible determinants of performance not captured by the

ownership variables, some observed company characteristics have been included as

control variables. The control variables used in the study have been selected with

reference to those employed in earlier studies12.

Age (AGE). Age of the company has an ambiguous effect a priori on company

performance. Ang et al. (1998) argued that due to the effects of the learning curve and

survival bias older firms are likely to be more efficient than younger ones. Thus, a better

performance should be expected. However, older companies are prone to inertia, and

rigidities in adaptability, which may lead to lower performance. Age has been measured

as the number of years for which the company has been in existence since incorporation

to the date of observation.

Size (SIZE). A vast amount of literature has investigated the relation between size and

performance of firms. Band (1981) and Reinganum (1981) documented that small firms

have higher returns than large firms, even after adjusting for risk via the Capital Asset

Pricing Model (CAPM). Lang and Stulz (1994) reported significant negative correlation

12 See for example, Li et al. (2006), Kumar (2004), Habib and Ljungquist (2000), Himmelberg et al. (1999), and Daily et al. (1998).

Introduction

45

between size and Tobin’s Q. Firm size can be measured in different ways, using total

assets as a proxy of firm size. Gilson (1997) used the natural log of total assets as a proxy

of firm size. The literature also shows that alternative measures of size, based on annual

sales or total asset values, do not materially affect the inferences. This has been measured

by the natural logarithm of total assets of firms.

Industry classification (IND). Previous research has found that ownership structure is

sensitive to industry effects (Pedersen and Thomsen, 1997; and Thomsen and Pedersen,

1998). Industry control for manufacturing/services with dummy variables for different

categories has been made.

Leverage (LEV). Theories on the role of debt provide us with a complementary corporate

governance mechanism that monitors the management (Jensen, 1989; and Thomsen and

Pedersen, 2000). Leverage has been measured as long-term debt/(debt + equity), to

control for variations in capital structure and as proxy for default risk.

Growth (GROWTH). Companies with high growth opportunities should have a higher

valuation in an efficient market. The research and development expenditure of a company

may yield positive returns in future, improving company performance (Anderson and

Reeb, 2008). This variable also controls for opportunities of discretionary expenditure by

management (Caves, 1996; and Cui and Mak, 2002). Growth has been measured by the

ratio of research and development expenditure to total sales.

Risk (RISK). Company specific uncertainty has been found to influence corporate

ownership structures (Demsetz and Lehn, 1985; Himmelberg et al., 1999; and Pedersen

and Thomsen, 1999). Company risk has been measured by beta.

Introduction

46

1.6.3 Hypotheses Many empirical studies have tested the effects of ownership structure on corporate

governance and performance. Evidences on these effects, however, have been mixed. In

spite of these discrepancies, there have been some relatively consistent findings and

observations from past research, on the basis of which hypotheses have been formulated.

The study tests the following hypotheses:

Hypothesis 1a. There is a significant relationship between the ownership by Indian

promoters and return on assets.

Hypotheses 1b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 2a. There is a significant relationship between the ownership by Indian

promoters and tobin’s q.

Hypotheses 2b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 3a. There is a significant relationship between the ownership by Indian

promoters and ownership concentration.

Hypotheses 3b-d. The hypotheses are on similar lines as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 4a. There is a significant relationship between the ownership by Indian

promoters and board size.

Introduction

47

Hypotheses 4b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 5a. There is a significant relationship between the ownership by Indian

promoters and board composition.

Hypotheses 5b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 6. There is a significant relationship between the ownership concentration

and return on assets.

Hypothesis 7. There is a significant relationship between the ownership concentration

and tobin’s q.

Hypothesis 8a. There is a significant relationship between the ownership by Indian

promoters, ownership concentration and return on assets.

Hypotheses 8b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 9a. There is a significant relationship between the ownership by Indian

promoters, board size and return on assets.

Hypotheses 9b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Introduction

48

Hypothesis 10a. There is a significant relationship between the ownership by Indian

promoters, board composition and return on assets.

Hypotheses 10b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 11a. There is a significant relationship between the ownership by Indian

promoters, ownership concentration and tobin’s q.

Hypotheses 11b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 12a. There is a significant relationship between the ownership by Indian

promoters, board size and tobin’s q.

Hypotheses 12b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

Hypothesis 13a. There is a significant relationship between the ownership by Indian

promoters, board composition and tobin’s q.

Hypotheses 13b-d. The hypotheses are on similar line as above with the words ‘Indian

promoters’ substituted for foreign promoters, institutional investors and non-institutional

investors respectively.

1.6.4 Data Analyses The data analyses to study effects of ownership structure on corporate governance and

performance were conducted in two stages:

Introduction

49

Stage 1: The measurement model was estimated using confirmatory factor analysis

(Appendix V). The principal components approach to factor analysis has been used. The

criterion of minimum salient loading of variables on components (Guilford, 1956; Horn,

1967; Cliff and Hamburger, 1967; Pennell, 1968; Humphrey’s et al., 1969; Lawley and

Maxwell, 1973; Nunnally, 1979 etc.) has been considered. Accordingly, the minimum

absolute magnitude of 0.40 for component’s loadings is taken for the rotated factors

(components) respectively. The Kaiser-Meyer-Olkin (KMO) measure of sampling

adequacy has been used to gauge the appropriateness of factor analysis approach.13 The

decision for the extraction and retention of significant components has been taken by

keeping in view the recommendations about the same by Guttman’s (1940), Kaiser’s

(1958), and Bentler’s (1968) mathematical/psychometric/ statistical criterion of latent

roots greater than or equal to unity. Further, the Bartlett’s (1950, 1951) multivariate test

of sphericity revealed that the correlation matrix R obtained was positive definite.14

Stage 2: Both cross-sectional and pooled regression analyses have been run to observe

the ownership-governance-performance relationship. The study employs a panel

regression model which involves pooling of observations on a cross-section of units over

several time periods and provides results that are simply not detectable in pure cross-

sections or pure time-series studies. The panel regression equation differs from a regular

time-series or cross section regression by the double subscript attached to each variable.

The general form of panel data model can be specified more compactly as:

Yit = β1 + β2X2it + β3X3it + …….. + βkXkit + µit

13 Kaiser-Meyer-Olkin Measure of Sampling Adequacy was 0.503. 14 All the eigen values were positive i.e., the correlation matrix was of full rank. Further, the explanatory variables under investigation did not suffer from serious degree of multicollinearity.

Introduction

50

i = 1, 2, 3…, N

t = 1, 2, 3…., T

where i stands for the ith cross-sectional unit and t for the tth time period.

Multivariate regression analysis on panel data is used to empirically test the

hypotheses discussed above. Using combination of variables models of linear regression

equations was constructed. Model 1 entered only ownership structure variables as

independent variables with dependent being either of the governance or performance

variable. Model 2 then entered control variables in a way so that the stability of the

regression coefficients to the main independent variables could be assessed (Tsui et al.,

1992).

The following models have been employed to examine hypotheses H1and H2:

Model 1: Performance = β1 + β2 (ownership) + µ

Model 2: Performance = β1 + β2 (ownership) + β3 (control_ variables) + µ

where performance is a vector of corporate performance, ownership is a vector for

ownership structure variables, and control variables includes a set of six variables.

The following models have been employed to examine hypotheses H3 to H5:

Model 1: Governance = β1 + β2 (ownership) + µ

Model 2: Governance = β1 + β2 (ownership) + β3 (control_ variables) + µ

where governance is a vector of corporate governance, ownership is a vector for

ownership structure variables, and control variables includes a set of six variables.

The following models have been employed to examine hypotheses H6 and H7:

Performance = β1 + β2 (concentration) + β3 (control_ variables) + µ

Introduction

51

where performance is a vector of corporate performance, concentration represents

ownership concentration, and control variables includes a set of six variables.

The following models have been employed to examine hypotheses H8 to H13:

Performance = β1 + β2 (ownership) + β3 (governance) + β3 (control_ variables) + µ

where performance is a vector of corporate performance, ownership is a vector for

ownership structure variables, governance is a vector of corporate governance, and

control variables includes a set of six variables.

1.7 Limitations of the Study

The study is subject to the following limitations:

1. The non-availability of complete ownership data of companies has been a

constraint in assessment of ownership structure;

2. The validity of the results drawn primarily depends on the nature of the database;

3. Many factors influence performance and not all of them have been controlled for;

and

4. To test the governance structure and performance of companies, it may be

necessary to collect data for a longer time horizon.

1.8 Plan of the Study

In the preceding pages a brief introduction, concept and importance of corporate

governance together with the review of literature, reasons for the selection of the

problem, objectives and research design of the empirical study have been taken up.

Chapter 2 which follows looks into the legal and regulatory framework concerning

corporate governance in India. Chapter 3 discusses the structure of corporate ownership

Introduction

52

and its concentration. Chapter 4 presents the findings of the effects of ownership structure

on corporate governance and performance. The concluding chapter (Chapter 5) integrates

the investigated findings about corporate governance issues especially those concerning

ownership structures and performance. On the basis of the conclusions reached certain

suggestions have been made to provide a fresh perspective on the issue.

Legal and Regulatory Framework

53

Chapter 2

THE LEGAL AND REGULATORY FRAMEWORK CONCERNING CORPORATE GOVERNANCE IN

INDIA

he corporate governance issues have received considerable attention because of

their apparent importance for the economic health of companies and society at

large especially after plethora of corporate scams and debacles in the recent times. The

U.S., Canada, the U.K., other European Countries, the East Asian countries, and even

India for that matter have witnessed severe strain on their economies together with the

failure of several leading companies in the last two decades or so. This has resulted in

greater emphasis and attention on the corporate governance issues (Dalton and Dalton,

2005).

The legal and regulatory system of a country plays a crucial role in creating an

effective corporate governance mechanism in a country, the development of markets and

economic growth. There is considerable evidence reiterating the interaction between

property rights and institutional arrangements in shaping economic behaviours.15

According to La Porta et al. (1997, 1998) country’s legal framework affect firm’s

external financing and investment. The investment and financing pattern in turn affects

the economic growth of a country (Stijn and Joseph 2002). Prowse (1994) argued that

firms’ legal and regulatory environment explain the degree to which the concentration

holding of the firm financial claim is achieved.

15 See for example, Coase (1937, 1960); Alchian (1965); Demsetz (1964); Cheung (1970, 1983); and North (1981, 1990).

T

Legal and Regulatory Framework

54

While there seem to be a movement towards a convergence in corporate

governance norms, differences persist. These differences have strong linkage with the

nature of the legal systems and the markets themselves. Extant research evidences two

systems of corporate governance (Table 2.1). First, the outsider systems typical in the

U.S. and U.K. which are generally characterized by an active and liquid stock market,

separation of ownership and control, institutional investment looking at the return in the

short and medium term, and stringent disclosure norms aimed at ensuring that investors

can make their own informed decisions. Insider systems typical in continental Europe and

some Asian countries which are commonly characterized by concentrated ownership or

voting power and a multiplicity of inter-firm relationships and corporate holdings, greater

emphasis on stakeholder issues, and institutional investment based on strong links with

the company.

Table 2.1: A Comparison of UK/USA Model and the Asian Model

The UK/US Model The Asian Model Shareholder Environment

• Dispersed ownership • The separation of owners

and managers • Highly developed

institutional investment

• Concentrated ownership • Owners as directors and

managers • Reliance on family and/or

state finance Capital Market • Active and liquid stock

market • Active market for

corporate control • Tight regulation

• Les developed and less liquid stock market

• Limited market for corporate control

• Loose regulation Independence

and Performance

• Non-executive majority board

• Arm-length activities • Aligned incentive

• ‘Insider’ board • Relationship-based

activities • Incentives aligned with

major shareholders Transparency

and Accountability

• High disclosure and transparency

• Clear line of accountability • High minority protection

• Low disclosure and transparency

• Unclear line of accountability

• Inadequate minority protection

Legal and Regulatory Framework

55

Although the Indian legal system is obviously built on the English common law

system, the corporate governance system in by and large a hybrid of the outsider systems

and the insider systems (Sarkar and Sarkar, 2002). The Indian corporate sector is a mix of

government and private companies (business group families, multinationals and

individual companies), however, it has not suffered from the cronyism that has dominated

some of the developing economies, nor does it possess the characteristics of the Korean

chaebols (Publication, 2001). In light of these observations there emerges an opportunity

to study the legal and regulatory framework governing corporate governance in India.

The aim of this chapter is to present an overview of India’s legal and regulatory

system, and the historical factors and experiences that have contributed to the current

corporate governance system. The next section makes an assessment of the legal and

institutional aspects. Section 3 briefly describes the historical evolution and the recent

developments in corporate governance in India. Section 4 looks into the degree of

compliance to corporate governance norms. Section 4 summarizes and concludes.

2.1 Assessment of the Institutional Framework Since India’s independence in 1947 and prior to the reforms in the 1990s, India had

adopted a command and control approach to development. Apart from regulating external

trade and exchange rates, the government nationalized various productive activities.

Further, a highly complex regime was set up to regulate industrial activities through

licensing control, reservation of many productive activities to the public sector, and

control of labor markets, prices, and wages. Liberalization in the 1990s has significantly

opened up the Indian economy and gradually relaxed the government control over

licensing, marketing, and prices (Dasgupta and Liu, 2004).

Legal and Regulatory Framework

56

The federal structure of India stipulates that certain aspects of business

regulations are within the exclusive purview of the central government (for example exit

policy and bankruptcy procedures), some are within the purview of both the centre and

the states (for example entry and labor regulations), while others are largely within the

domain of the states (for example inspections and compliance with regulations).

Entry regulations concerning areas which are reserved to the public sector or

certain categories of industries is within the purview of the central government. With

regards to how easy it is for the private sector to set up a new business in permitted areas

taking into account necessary safeguards for environment and social concerns has

increasingly become a state’s issue, though for important and large foreign direct

investment projects, the central government continues to play an important role. Exit

regulations concern both the bankruptcy procedures that govern the disposal and

restructuring of assets as well as labor laws governing the retrenchment of labor force.

Exit and bankruptcy regulations and procedures in India are outdated and ineffective.

Automatic appeals, extensive litigation by the government, underdeveloped alternative

mechanisms of dispute resolution like arbitration, and the shortfall of judges all

contribute to this unenviable state of affairs in Indian courts (Chakrarbarti, 2007). Labor

market restrictions on hiring and firing workers remain one of the greatest challenges of

doing business in India (World Bank, 2003a). Regulations over operations of ongoing

business rest with state governments, while the central government laws are important

frameworks for state regulations. Understanding the respective roles of the central and

state governments in business regulation is important to have a deeper appreciation of the

issues and reforms required.

Legal and Regulatory Framework

57

However, government regulations of business entry, exit and operations remain

complex, and India lags behind most of the countries in the South Asian region as shown

in Table 2.2. The Indian legal system provides one of the highest levels of investor

protection in the region with a high disclosure and investor protection index. Further, in

terms of investor protection creditor rights, it also seems to provide excellent protection

for lenders. However, enforcement variables provide a different picture of India’s true

level of investor protection. Though, the SEBI has had some success prosecuting

intermediaries, it has failed to convince the Securities Appellate Tribunal (SAT) in its

proceedings against corporate insiders and major market players. Thus, the quality of

public enforcement of securities laws in India appears problematic. Thus, it appears that

de facto protection of investor’s rights in India lags far behind the de jure protection.

Referring to one important segment of the Indian economy, the micro and small

enterprises (MSEs), results indicate that they operate in a system governed almost

completely with informal mechanisms based on trust, reciprocity and reputation, with

little recourse to the legal system (Allen et al., 2006). The MSEs have contributed around

39 per cent of the country’s manufacturing output and 34 per cent of its exports in 2004-

05.16 The Government took a major initiative through the enactment of the Micro, Small

and Medium Enterprises Development (SMED) Act, 2006 which provides the first-ever

legal framework for recognition of the concept of ‘enterprise’ (comprising both

manufacturing and services) and integrates the three tiers of these enterprises, viz, micro,

small and medium. The Act provides for a statutory consultative mechanism at the

national level with wide representation of all sections of stakeholders and with a wide

range of advisory functions. 16 See The Economic Survey, 2007-08

Legal and Regulatory Framework

58

Table 2.2: Doing Business in India, 2008

Indicator India Region Starting a Business Procedures (number) 13 7.6 Duration (days) 33 33.4 Cost (% GNI per capita) 74.6 40.7 Dealing with Licenses Procedures (number) 20 16.3 Duration (days) 224 247.3 Cost (% of income per capita) 519.4 3,230.0 Employing Workers Difficulty of hiring 0 23.6 Rigidity of hours index 20 17.5 Difficulty of firing index 70 40.0 Rigidity of employment index 30 27.0 Non wage labour cost (% of salary) 17 6.7 Firing cost (weeks of wages) 56 66.0 Registering Property Procedures (number) 6 6.4 Duration (days) 62 134.1 Cost (% of property value) 7.7 6.0 Getting Credit Legal rights index 6 3.9 Credit information index 4 1.9 Public registry coverage (% adults) 0 0.7 Private bureau coverage (% adults) 10.8 1.9 Protecting Investors Disclosure index 7 4.3 Director liability index 4 4.3 Shareholder suits index 7 6.4 Investor protection index 6 5.0 Paying Taxes Payments (number) 60 30.6 Time (hours) 271 305.5 Profit tax (%) 19.6 19.5 Labour tax and contributions (%) 18.4 7.5 Other taxes (%) 32.5 14.3 Total tax rate (% profit) 70.6 41.4 Trading Across Borders Documents for export (number) 8 8.6 Time for export (days) 18 32.5 Cost to export (US $ per container) 820 1,179.9 Document for import (number) 9 91 Time for import (days) 21 32.1 Cost to import (US $ per container) 910 1,417.9 Enforcing Contracts Procedures (number) 46 43.5 Duration (days) 1,420 1,047.1 Cost (% of claim) 39.6 27.2 Closing a Business Time (years) 10.0 5.0 Cost (% of estate) 9.0 6.5 Recovery rate (cents on the dollar) 11.6 20.1 Source: World Bank, 2008

The regulatory framework of corporate governance consists of the Companies

Act, the Securities and Exchange Board of India (SEBI) Act, 1992, the Securities

Legal and Regulatory Framework

59

Contracts (Regulation) Act, 1956, Sick Industrial Companies (Special Provisions) Act,

1985 and the Listing Agreement (Bansal, 2005).

2.1.1 Companies Act, 1956 The Companies Act, 1956 primarily regulates the formation, financing, functioning and

winding up of companies. The Act prescribes regulatory mechanism regarding all

relevant aspects including organizational, financial and managerial aspects of companies.

The winding up matters, presently are largely within jurisdiction of High Courts.

Regulation of the financial and management aspects constitutes the main focus of the

Act. In the functioning of corporate sector, although freedom of companies is important,

protection of investors and shareholders is also equally important. The Act plays the

balancing role between these two competing factors, namely, management autonomy and

investor protection. The main objects of the Act are as under.

(a) To protect the interests of a large number of shareholders, as there exists

separation of ownership from management in a company;

(b) To safeguard the interests of creditors;

(c) To help the development of companies in India on healthy lines, because

corporate sector constitutes a very important segment of the economy;

(d) To help the attainment of the ultimate ends of social and economic policy of

the Government; and

(e) To equip the Government with adequate powers to intervene in the affairs of a

company in public interest and as per procedure prescribed by law so that the

interests of all stakeholders may be protected from unscrupulous management.

Legal and Regulatory Framework

60

The Companies Act, 1956, has been amended as many as 24 times since 1956.

Certain important provisions pertaining to nomination facility for shareholders and

deposit holders, buyback of securities, relaxation on norms relating to inter-corporate

loans and investments, setting up of investor education and protection fund, allowing

sweat equity and compliance of accounting standards in preparation of annual accounts

were introduced through Companies (Amendment) Act, 1999. The Companies

(Amendment) Act, 2000 provided for postal ballot, audit committees, directors

responsibility statement, debenture trustees, secretarial compliance certificate, reduction

of time for payment of dividend, ten fold increases in fines and option for election of a

director. The Companies (Amendment) Act, 2006 amended section 266B which provided

that no individual can be appointed or reappointed as director of a company unless a

director identification number was allotted to the same. Further, new sections 610 B, C, D

and E relate to filing of application, documents, inspection etc. through electronic form

have been introduced.

With a view to improving the processing of investor’s grievances, a new system

for on-line lodging of complaints by investors and depositors has been developed in

MCA 21 e-governance programme of the Ministry of Corporate Affairs (MCA). The new

system facilitates investors and depositors to electronically lodge their complaints with

the Investor Protection Cell of the Ministry without the requirement of sending their

grievances in writing through post.

2.1.2 Securities and Exchange Board of India (SEBI) Act, 1992

The SEBI Act, 1992 established the independent capital market regulatory authority,

SEBI, with the objective to protect the interests of investors in securities and to promote

and regulate the securities markets.

Legal and Regulatory Framework

61

The SEBI is empowered to investigate the affairs of securities market

intermediaries or persons associated with security market or any other persons suspected

to have violated any regulatory provisions, if it has reasonable grounds to believe that

transactions in securities are being conducted in a manner detrimental to the investors or

the market or that the intermediary or person concerned has violated any regulatory

provisions. Investigations are undertaken to probe into possible or suspected or alleged

infringements of security market regulations such as price-manipulation, artificial

volume-creation, insider trading, violation of takeover code or any other regulations,

public issue related irregularities or any fraudulent or unfair trade practices.

Investigations are initiated based on evidence available from various sources including

the SEBI’s own surveillance activities and its other divisions, stock exchanges and other

intermediaries, complaints from various sources and even press reports. In carrying out

formal investigation, the SEBI, as it is empowered, calls for information, compels

production of documents, summons persons for interrogation, examines witnesses and,

where necessary, with magistrate’s approval, carry out even search and seizure

operations. On completion of investigation, enforcement actions are taken through quasi-

judicial process of enquiry, personal hearing etc. Depending on the nature and the gravity

of offences, penal actions are taken. These include warning, suspension of activities, and

cancellation of registration, prohibition of dealing in securities, denial of access to the

capital market for a specified period and imposition of monetary penalties. And, where

appropriate, prosecution proceedings are also launched. A time limit of four months has

been set for completion of preliminary investigations and eight months for completion of

formal investigations. Appendix VI list the regulations which have been formulated and

Legal and Regulatory Framework

62

promulgated by the SEBI to promote, protect and regulate various aspects of the Indian

capital market.

Furthermore, the SEBI come under the purview of newly enacted Right to

Information (RTI) Act which sets out the practical regime of right to information for

citizens to secure access to information under the control of public authorities in order to

promote transparency and accountability in the working of any public authority.

2.1.3 Securities Contracts (Regulation) Act, 1956 The Securities Contracts (Regulation) Act, 1956 or SCRA containing a mere 31 sections

keeps a tight vigil over all the stock exchanges of India. The provisions of the Act were

formally administered by the Central Government. However, since the enactment of the

SEBI Act, 1992 the Board established under it (SEBI) is concurrently having powers to

administer almost all the provisions of the Act. It covers all types of tradable government

paper, shares, stocks, bonds, debentures and any other form of marketable securities

issued by companies, including the ‘rights and interest in securities’ thus effectively

allowing for options. The SCRA defines the parameters of conduct of stock exchanges as

well as its powers.

2.1.4 Sick Industrial Companies (Special Provisions) Act, 1985 Bankruptcy reorganization of large industrial companies is governed by the Sick

Industrial Companies (Special Provisions) Act, 1985 or SICA, and the process is directed

and supervised by the Board for Financial and Industrial Reconstruction (BIFR). The

BIFR, which was created along with the appellate authority under the SICA, 1985 had

two major concerns as under.

Legal and Regulatory Framework

63

(a) To protect employment; and

(b) To gainfully use country’s resources

Where an industrial company has become a sick industrial company, the Board of

Directors of the company, shall, within 60 days from the date of finalization of the duly

audited accounts of the company for the financial year as at the end of which the

company has become a sick industrial company, make a reference to the Board for

determination of the measures which shall be adopted with respect to the company. The

companies are required to come to the Board and register when their net worth has been

fully eroded although Section 23 of the Act also envisages that company shall inform the

Board when 50 percent of its net worth is eroded. Further, the Central Government or the

Reserve Bank of India (RBI) or a State Government or a public financial institution or a

State level institution or a scheduled bank may, if it has sufficient reasons to believe that

any industrial company has become, for the purposes of this Act, a sick industrial

company, make a reference in respect of such company to the Board for determination of

the measures which may be adopted with respect to such company. The Board may make

such inquiry as it may deem fit for determining whether any industrial company has

become a sick industrial company and there upon make suitable orders.

Since its inception in May 1987 till the end of September 2006, the BIFR received

6,991 references under the SICA, 1985 (Table 2.3). With 6,991 references received,

5,412 were registered under section 15 of SICA. 1,707 were dismissed as non-

maintainable under the Act. 760 rehabilitation schemes, including 12 by Appellate

Authority of Industrial and Financial Reconstruction (AAIFR)/Supreme Court, were

sanctioned and 1,303 companies were recommended to be wound up. 485 companies

Legal and Regulatory Framework

64

have been declared ‘no longer sick’ and were discharged from the purview of SICA on

their net worth turning positive after the implementation of the schemes.

Table 2.3: References to BIFR (as on Sept. 30, 2006)

Source: BIFR, Ministry of Economic Affairs, Ministry of Finance

2.1.5 Listing Agreement Listing means admission of the securities to dealings on a recognized stock exchange.

The companies desirous of getting their securities listed are required to enter into an

agreement with the exchange called the Listing Agreement and they are required to make

certain disclosures and perform certain acts. As such, the agreement is of great

importance and is executed under the common seal of a company. The compliance with

the provisions of the agreement and need to be disclosed are as under.

Legal and Regulatory Framework

65

(a) Clause 16 read with section 154 of the Companies Act regarding the book

closure and record date and its purpose;

(b) Clause 20 about the timely disclosure of declaration of dividend to stock

exchanges;

(c) Clause 35 about furnishing of the quarterly report of the shareholding pattern

in the prescribed format to stock exchanges within 15 days of the end of the

quarter;

(d) Clause 47(c) about the obtaining of half yearly certificate from a company

secretary in practice and its submission to stock exchanges; and

(e) Clause 49 about furnishing quarterly report on corporate governance.

2.2 Governance Reforms in India Governance reforms in India are embedded in, and greatly influenced by the broader

institutional, economic, and social environments.

2.2.1 Historical Influences on the Current Corporate Governance System

The early corporate developments in India were marked by the managing agency system.

This contributed to the birth of dispersed equity ownership but also gave rise to the

practice of management enjoying control rights disproportionately greater than their stock

ownership.

From 1947 (independence) through 1991, the Indian government pursued socialist

policies. The state nationalized most banks, and became the principal provider of both

debt and equity capital for private firms. The performance of the government agencies

who provided capital to private firms was assessed based on the amount of capital

Legal and Regulatory Framework

66

invested rather that return on investment. This created little incentive for managers of

private firms to voluntarily adopt good governance practices. Moreover, private providers

of debt and equity capital faced serious obstacles to exercising oversight over managers

due to long delays in judicial proceedings and the bankruptcy process. Indian corporate

governance, which was considered to be comparable to that of British firms at

independence, deteriorated.

In 1991 the government faced a fiscal crisis. It responded by enacting a series of

reforms including reduction in state-provided financing, bank privatization, and general

liberalization of the economy. Following major liberalization in 1991, several significant

market scandals came to the fore. In addition to stock market frauds committed by large

brokers, there were incidents of companies allotting preferential shares to their promoters

at highly discounted prices, as well as several instances of vanishing companies

(Goswami, 2002). The most significant event in the evolution of the corporate

governance in post-liberalization period was the establishment of the SEBI in 1992. By

the mid-1990s, the Indian economy was growing steadily, and Indian firms began to seek

capital to finance expansion into the market spaces created by liberalization and the

growth of outsourcing. Globalization provided an ultimate impetus to the governance

reforms in India (Kota, 2006).

2.2.2 Recent Developments in Corporate Governance

In line with international developments, India has been gradually moving in the direction

of introducing significant changes in corporate governance by introducing appropriate

measures in the relevant legislations and rules. One of the first such endeavors was the

Confederation of Indian Industry (CII) Code for Desirable Corporate Governance,

Legal and Regulatory Framework

67

developed by a committee chaired by Rahul Bajaj. The committee was formed in 1996

and submitted its code in April 1998. Later the SEBI constituted three committees to look

into the issue of corporate governance-the first chaired by Kumar Mangalam Birla, which

submitted its report in early 2000, the second by Naresh Chandra was constituted in

August 2002 and the third by Narayana Murthy provided recommendations in 2003.

These three committees have been instrumental in bringing about far reaching changes in

corporate governance in India through the formulation of Clause 49 of Listing

Agreements. Box 2.1 highlights some of the important dates for the adoption of Clause

49 of the Listing Agreements.

The Securities Exchange Commission (SEC) and SEBI recently announced

increased cooperation and collaboration of capacity building events in India especially in

corporate governance and internal controls.17 Such initiatives will certainly provide the

SEBI with further opportunities to enhance securities regulation especially in the realm of

governance.

Clause 49 of the Listing Agreements The SEBI implemented the recommendations of the KMBC through the enactment of

Clause 49 of the Listing Agreements (Appendix VII). The terms were applied to

companies in the BSE 200 and S&P C&X Nifty indices, and all newly listed companies,

on March 31, 2001.

17 Available at http://www.sec.gov/news/press/2008/2008-3.htm

Legal and Regulatory Framework

68

Box 2.1: Important Dates for Adoption of Clause 49 of the Listing Agreements April 1998

CII releases Code of Corporate Governance

May 1999 Government announces support for governance reforms; SEBI announces formation of Kumarmangalam Birla Committee (KMBC) to propose these reforms

February 2000 Clause 49 of Listing Agreement (LA) introduced August 2002 Naresh Chandra Committee on corporate audit and governance February 2003 Narayana Murthy Committee-I (SEBI) August 2003 SEBI amended the LA and strengthened the criteria of independent

directors. November 2003 Narayana Murthy Committee-II (SEBI) October 2004 SEBI withdrew the amendment and introduced a revised LA with

March 2005 as the deadline. March 2005 The deadline was extended till December 2005 January 2006 Clause 49 of the LA after taking into account the recommendations of

Narayana Murthy Committee, applied. March 2007 Revised changes proposed to Clause 49 were placed for public

comments.

Source: SEBI

These rules were applied to companies with a paid up capital of Rs. 10 crore or

with a net worth of Rs. 25 crore at any time in the past five years on March 31, 2002, and

to other listed companies with a paid up capital of over Rs. 3 crore on March 31, 2003.

The Narayana Murthy Committee worked on further refining the rules, and Clause 49

was amended in 2004.

The major recommendations focused on the board of directors, audit procedures,

and shareholder rights as summarized below.

• Composition of the board: If there is a full-time chairman, 50 percent of the

directors must be non-executives and 50 percent must be executives.

• Constitution of audit committee: The committee must contain three independent

directors and a chairman with a sound financial background. A finance director,

Legal and Regulatory Framework

69

head of internal audit and a representative of the statutory auditor may be present

as special invitees, and a minimum of three meetings are to be convened. The

committee is responsible for the review of financial performance on a half-

yearly/annual basis, appointment/removal/remuneration of auditors, and review of

internal control systems and their adequacy.

• Board Procedures: At least four meetings are to be held each year. A director

cannot be a member of more than 10 committees, and a chairman cannot serve on

more than 5 committees across all companies.

• Management discussion and analysis report: This should include a discussion of

industry structure and trends, opportunities and threats, segment performance,

future outlook, and risks and concerns.

• Shareholders rights: Shareholders are entitled to have access to quarterly results,

analyst presentations, half-yearly financials and significant event reports, reviews

of complaints and grievances by non-executive directors, etc.

The Naresh Chandra Committee recommendations on audit reforms were also

formalized as part of the Companies (Amendment) Bill, 2003. This committee

recommended a list of disqualifications for audit assignments. Further, it recommended

preventing auditing firms from providing non-audit services to clients and requiring the

chief executive officer (CEO) and chief financial officer (CFO) of listed companies

certify to, and take responsibility for, the fairness and correctness of their company’s

annual audited accounts with a view to improve the corporate governance practices in the

corporate sector.

Legal and Regulatory Framework

70

The Narayana Murthy Committee reviewed the existing corporate governance

code in 2003 and proposed additional governance reforms and rules. Its recommendations

included the implementation of formal training for board members, the elimination of

nominee directors, the establishment of rules for treatment of independent directors, and

board oversight of business risk and risk management strategies. Other recommendations

which are being implemented through amendments in Clause 49 include the

strengthening of the responsibilities of the audit committee, improving the quality of

financial disclosures, the establishment of rules for the utilization of proceeds from IPOs,

the reviews of subsidiaries of holding companies and the implementation of policies to

protect whistle blowers who approach corporate audit committees.

Corporate Governance of Banks The banking sector witnessed sweeping changes since 1991, including the elimination of

interest rate controls, reduction in reserve and liquidity requirements and overhaul in

priority sector lending. Competition has been encouraged with the issuance of licenses to

new private banks and by giving more power and flexibility to bank managers, both in

directing credit and in setting prices. Persistent efforts by the RBI to put in effective

supervision and prudential norms since then have lifted the country closer to global

standards. The institution of Debt Recovery Tribunals (DRTs) in the early 1990’s and the

passage of the Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest (SARFAESI) Act in 2002 paved way to debt recovery problems of the

banks. Additionally, market institutions have been strengthened by government actions

attempting to infuse greater transparency and liquidity into markets for government

securities and other asset markets.

Legal and Regulatory Framework

71

This market orientation of governance in banking has been accompanied by

stronger disclosure norms and greater stress on periodic RBI surveillance. From 1994, the

Board for Financial Supervision (BFS) inspects and monitors banks using the CAMELS

(Capital adequacy, Asset quality, Management, Earnings, Liquidity and Systems and

controls) approach. Audit committees in banks have been stipulated since 1995. Greater

independence of public sector banks has been a major highlight of the reforms.

There has been an increasing emphasis on greater professional representation on

bank boards, with nominee directors being gradually phased out. Rules like non-lending

to companies that have one or more of a bank’s directors on their boards are being

reduced or removed altogether. The need for professional advice in the election of

executive directors is increasingly being realized.

Nevertheless, the corporate governance in co-operative banks and non-bank

financial companies (NBFC) perhaps needs the greatest attention from regulators. Rural

co-operative banks are frequently run by politically powerful families as their personal

fiefdoms, with little professional involvement and considerable channeling of credit to

family businesses.

Corporate Governance of the Central Public Sector Enterprises (CPSE) The Government since independence envisaged a strong and effective public

sector whose social objectives would be met without prejudice to its commercial

functioning. The Industrial Policy Resolution of 1956 reserved the commanding heights

of the economy for the public sector, and during the second half of the twentieth century

the number of CPSEs in India climbed steadily. At present 44 CPSEs are listed on the

Legal and Regulatory Framework

72

domestic stock exchanges.18 While the shares of MTNL (ADR) are listed on the New

York Stock Exchange (NYSE), the shares of GAIL and SAIL are listed on the London

Stock Exchange (LSE).

In order to ensure and encourage efficiency in their functioning, Government has

taken various steps to professionalize the boards of CPSEs. These include provision of

outside professionals in the form of part-time non-official directors, restricting the

number of Government nominated directors to one-sixth of the actual strength of the

board subject to a maximum of two, and incorporation of functional directors up to a

limit of 50 per cent of the actual strength of the board. On the recommendations of Arjun

Sen Gupta Committee, the Government, during 1987-88, introduced the concept of

Memorandum of Understanding (MOU) to ensure clarity in the functioning of CPSEs,

and proper balance between accountability and autonomy for better results. In order to

further the competitive spirit, an attempt has also been made to evaluate the performance

of the CPSEs on the basis of sales, growth of sales, net profit, growth in net profit, return

on net worth, earning per share, and dividend pay-out ratio.

The Government policy on disinvestment has evolved over the last decade and

has been generally announced through the Budget. Added, efforts are being made to

modernize and restructure sick CPSEs and revive sick industry. To further help the

CPSEs to turn around financially, the Government set up the Board for Reconstruction of

Public Sector Enterprises (BRPSE) in December 2004 to recommend measures for

restructuring/reviving CPSEs referred to them. The BRPSE also recommends cases

where disinvestment or closure or sale is justified. At present, the policy is to list large,

profitable CPSEs on domestic stock exchanges. 18 See Economic Survey, 2007-08

Legal and Regulatory Framework

73

Accounting Standards and Disclosures Realizing that without greater transparency, new laws and governance codes can do little

to build investor confidence, the KMBC recommended introduction of new accounting

standards pertaining to consolidation of subsidiary accounts, segment reporting on

multiple lines of business, disclosure of related party transaction and disclosure of

treatment of deferred taxation. For better transparency and disclosure the Institute of

Chartered Accountants of India (ICAI), the apex body of India’s accountants, introduced

six new accounting standards (AS-17 to AS-22) in 2002 itself. At present there are 32

accounting standards as listed in Appendix VIII.

Global competition for resources, markets and production efficiencies continue to

drive cross border flow of goods, services and capital. One of the most daunting tasks

faced by multinational enterprises is complying with multiple sets of accounting

standards. Convergence towards one set of standards i.e., the International Financial

Reporting Standards (IFRS) in the accounting area is evident. India has targeted 2011 as

the year for full transition to IFRS. As a result it will not only become easier for a

company to conduct business and raise capital from anywhere in the world but would

result in enhanced disclosure and transparency for the investors.

Corporate Governance Rating After the emergence of the corporate scandals across the globe there was a great demand

from the investing community to quantify and assess corporate governance practices of

various listed companies. To identify and measure governance risk, leading global rating

agencies have developed corporate governance rating criteria and started assessing

companies. The broad objective of a corporate governance rating is to measure

Legal and Regulatory Framework

74

governance quality, and accelerate the pace at which companies develop and implement

best practices in corporate governance. In India, two credit rating agencies namely

CRISIL and ICRA undertake corporate governance rating.

CRISIL has taken the initiative to assist Indian companies to identify the existing

corporate governance practices and improve them to attain global standards. A CRISIL

Governance and Value Creation (GVC) rating diagnostic study is an analysis of the

governance and value creation practices of a company based on an interactive process.

ICRA’s Corporate Governance Rating (CGR) is meant to indicate the relative

level to which an organization accepts and follows the codes and guidelines of corporate

governance practices. The emphasis of ICRA rating is on corporate’s business practices

and quality of disclosure standards that address the requirements of the regulators and are

fair and transparent for its financial stakeholders.

2.3 CORPORATE GOVERNANCE REFORMS: EMPIRICAL EVIDENCE

2.3.1 Evaluation of Governance Initiatives

There is sufficient evidence that effective governance mechanisms include both internal

mechanisms, such as the board of directors and its major committees, and external

mechanisms such as hostile takeover bids, leveraged buyouts, proxy contests, legal

protection of minority shareholders, and the disciplining of managers in external labour

market (Dharwadkar et al., 2000). So far, India’s corporate governance reforms have

mainly focused on internal mechanisms and compare favourably with the rest of the

world as is evidenced by a number of studies. The World Bank (2003b; 2004a & b;

2005a, b & c; 2006a & b) has conducted a number of studies of corporate governance

Legal and Regulatory Framework

75

practices in various countries all over the world. It has conducted eight studies of Asian

countries. McGee (2008) summarized some of the components of those studies to come

up with a corporate governance score. The results indicated that India had the highest

total score, at 92 (out of 110), which was 83.6 percent of the possible score (Chart 2.1).

Chart 2.1: Corporate Governance Score of Eight Asian Countries (based on 100%)

Source: McGee (2008)

Given the short history of India’s economic liberalization, the external monitoring

system is still in its infancy, and this prohibits the effective implementation of

governance reforms. Although there are regulatory restrictions on investors’ holding

stakes in individual firms yet it has not led to dispersed holdings (Table 2.4). This has

resulted in unaddressed conflicts between dominant shareholders and the minority

shareholders (Varma, 1997). There are at least two types of dominant shareholders.

Legal and Regulatory Framework

76

Table 2.4: Legal and Regulatory Constraints on Corporate Control

Institution Constraint on Corporate Control Banks The RBI discourages ownership on prudential grounds. Capital

adequacy rules deject large stakes in companies. Insurance Companies Self-imposed limits on fund assets invested in any one company

stemming from fiduciary requirement of liquidity as mandated by the Insurance Regulatory and Development Authority (IRDA).

Mutual Funds Restricted to take large stakes in companies. Restrictions on investment in debt instruments,

Pension Funds Self-imposed limits on fund assets invested in any one company stemming from fiduciary requirement of liquidity. Investment patterns are conservative and restrictive.

General The SEBI (Prohibition of Insider Trading) Regulations, 1992 discourage large stakeholders from exerting control. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 regulate the direct or indirect acquisition of shares and control of listed companies and seek to protect minority shareholder interest by imposing public offer obligations on acquirers. The SICA, 1985 provides for the creditor-in-control of company being liable to subordination of its loans. The Competition Act, 2002 seeks to prohibit anti-competitive agreement, abuse of dominant position by an enterprise and to regulate certain combinations which include acquisition of shares, acquiring of control and mergers/amalgamation between and amongst enterprises.

Source: MCA, MOF, RBI, SEBI, IRDA and CCI

The first type is the state ownership, which is manifested in CPSEs. The

second type is evident in large, often family owned or controlled business groups. The

family controlled businesses own over 45 percent of all Indian companies (Rajagopalan

and Zhang, 2007). These extremely high owner concentrations make hostile takeovers

and leveraged buyouts unlikely to occur. Further, there is evidence of pyramiding and

tunneling among Indian business groups and signs of widespread earnings management

in many firms (Bertrand et al., 2002; and Kali and Sarkar, 2007).

Legal and Regulatory Framework

77

A comparison of 50 S&P CNX Nifty companies with selected NYSE 100 index

carried out by CRISIL put forth some interesting findings on governance issues.19 The

study found that 48 percent of Indian companies have the largest shareholding over 50

percent stake. In the U.S., the largest shareholder holds less than 10 percent. In India, the

largest board size is 17 and the smallest is 4, with 44 percent of top 50 having more than

12 directors. In the U.S., the largest board size is 18 and the smallest is 10, with 66

percent of top 50 have over 12 directors. Of the 50 Indian companies, 58 percent have

majority independent boards, while 12 percent have less than one-third independent

directors. By contrast, in the U.S., all the 50 companies have majority independent

boards. Further, in India 35 of the 50 companies have 50 percent or more executive

directors on boards, while in the U.S., 98 percent of companies have less than 25 percent

executive directors, which means the majority directors on the U.S. boards are non-

executive directors. 60 percent of the top 50 Indian companies have separate chairmen

and CEOs, while this figure is only 20 percent for the U.S. companies. A lead

independent director is present in only three Indian companies, while 20 U.S. companies

have such directors. In the U.S., all the 50 companies have fully independent audit,

remuneration and nomination committees. In India, percentages of companies having

independent committees vary. Going through individual parameters, it’s clear that Indian

companies have a long way to go on certain governance aspects.

2.3.2 Degree of Compliance The World Bank’s 2004 Report on the Observance of Standards and Codes (ROSCs)

documented major gaps and lapses in the implementation of governance rules,

19 As reported in “No Single Formula for Governance,” by Sourav Majumdar, The Financial Express, Thursday, Sept. 15, 2005, 5.

Legal and Regulatory Framework

78

particularly in relation to the role of nominees directors from financial institutions, stock

listing laws and regulations, insider trading, dividend and share transfer transactions

(World Bank, 2004a).

The Narayana Murthy Committee tabled a report in 2002 highlighting the extent

of compliance of the BSE companies with Clause 49 of Listing Agreement. Chart 2.2

shows the frequency of compliance of companies to the different aspects of the corporate

Chart 2.2: Compliance with Clause 49 of Listing Agreement

(30 Sept. 2002, BSE companies)

Source: Narayana Murthy Committee Report, SEBI

governance regulation. Noticeably much more needs to be accomplished in the area of

compliance especially with regards to board procedures and role of the remuneration

committee.

Legal and Regulatory Framework

79

According to the joint survey by Moody’s Investors Service and its domestic

associate ICRA Ltd., the family-owned companies face governance issues such as

appointment of successors and transparency in functioning.20 The survey covered 32

companies in 16 prominent family groups, covering a broad cross-section of Indian

industry. The lack of board nomination sub-committees in many companies suggests that

succession plan is not fully deliberated with independent directors. There is often

insufficient transparency on ownership, related-party transactions and the group’s

financial position.

Clearly, the lax governance environment cannot be attributed to the absence of

formal governance laws, but to the relatively weak or absent enforcement mechanism.

However, lately the SEBI has certainly sent a signal that it’s in control of the markets and

won’t tolerate any misconduct on account of compliance. It has initiated adjudication

proceedings against 20 companies for non-compliance with corporate governance norms

under their listing agreement in September 2007.21 Adjudication proceedings are in the

nature of seeking clarification from the companies on the information submitted by stock

exchanges in their quarterly report on compliance with Clause 49. Five of the 20 entities

were public sector companies who have not complied with provisions related to board

composition. Of the remaining 15 companies, which were in the private sector, three have

been proceeded against for non-compliance with almost all the major provisions of

Clause 49.

20 As reported in “Family-owned Firms Face Governance Issues,” by Business Standard, Tuesday, Oct. 23, 2007, 4. 21 As reported in “SEBI Proceeds against 20 Companies for not Complying with Clause 49 Norms,” by Business Line, Wednesday, Sept. 12, 2007, 1.

Legal and Regulatory Framework

80

2.5. Conclusion It is quite evident that the regulatory bodies in India have advocated comprehensive and

rigorous corporate governance reforms which emphasize the importance of the credibility

and integrity of the listed companies, the responsibilities of minority shareholders, and

the necessity for information disclosure. Over regulation and under enforcement are

common themes that characterize governance systems in India.

Governance in the broader context has however not percolated through all layers

of the financial system. Corporate governance of Indian banks is undergoing a process of

change with a move towards more market-based governance. Governance in co-operative

banks, non-bank financial companies (NBFC), MSEs and unlisted companies perhaps

needs the greatest attention from regulators. Further, there is an immediate need to

tighten the laws and introduce reforms in the pension and insurance sectors.

India’s corporate governance framework suffers from regulatory arbitrage. Three

regulatory agencies namely, the MCA, RBI and SEBI possess the power to prescribe

laws and finally enforce them. The Government of India should establish a definite

mandate for each regulatory agency, thereby strengthening the enforcement mechanisms.

Although India’s investor protection laws are somewhat sophisticated there is an urgent

need to revamp the judicial system so as to deliver fast justice and increase judicial

efficiency. Some steps have been taken by the judiciary to develop ‘human rights

jurisprudence’ within the framework of corporate India. Companies, for example, are

required to set in place internal systems as recommended by the Supreme Court to

prevent sexual harassment at the workplace. There is also a need to implement more

robust bankruptcy laws so that they are predictable, transparent and affordable.

Legal and Regulatory Framework

81

Eventually, governance reforms will only be effective if many more companies

and all regulatory bodies strictly implement Clause 49 of the listing agreement, or

similar, provisions. This implies that efforts to raise corporate governance need to be

accompanied by a stronger enforcement of the legal framework so as to bring stability in

its capital markets and foster investor confidence.

Structure of Ownership and Concentration

82

Chapter 3

THE STRUCTURE OF CORPORATE OWNERSHIP AND ITS CONCENTRATION

he rise of the modern corporation, with its separation of owners from the

management, has created a set of agency problems that can cause investment

decisions to deviate from what is expected from neoclassical models (Mueller, 2003). In

the absence of agency problems, investment decisions and firm performance should be

expected to be independent from the structure and concentration of ownership. However,

if agency problems can be attributed to the fact that firms are incorporated one should no

longer expect firm value and investment decisions to be independent from ownership

structure and concentration. This was observed by Adam Smith (1776) in his publication

An Inquiry into the Nature and Causes of the Wealth of Nations. In Smith’s words:

“The directors of such companies, however, being the managers rather of other people’s

money than of their own, cannot well be expected, that they should watch over it with the

same anxious vigilance with which the partners of a private copartnery frequently watch

over their own.”

Berle and Means (1932) conducted the pioneering study on ownership and

control. In their study they highlighted the potential conflict of interest between managers

and diffuse shareholders when managers do not have any ownership interest in the firm.

They recognized that more concentrated ownership will establish a stronger link between

managerial behaviour and owner interests, thus leading to higher profit rates. Later,

Jensen and Meckling (1976) provided a more theoretical underpinning to the linkages

T

Structure of Ownership and Concentration

83

between agency costs22 and ownership structure. They analysed how the interests of

utility maximizing owner-managers and minority shareholders diverged as ownership

structure became more dispersed. They argued that investors with high stakes will also

have strong incentives to maximize firm value. This is referred to as the incentive effect.

Other sources of disciplinary control over managers include takeovers and the market for

corporate control (Manne 1965), executive compensation (Iacobucci and Trebilcock,

1996), product market discipline (Hart 1983), the managerial labor market (Fama 1980),

and such outside stakeholders as creditors (Triantis, 1996; and Triantis and Daniels,

1995). Finally, by establishing disclosure obligations or fiduciary duties, the law itself

may exert pressure on managers (Eggertsson, 1990).

However, not all have seen the separation of ownership and control as a potential

problem, where the counter hypothesis is that control and ownership separation may

improve allocate efficiency (Morck et al., 1988; Mikkelson and Partch, 1989; and

McConnell and Servaes, 1990). Veblen (1921) argued that this separation would turn

‘monopoly’ seeking owners to growth and efficiency seeking management. Recognizing

that owner-managers are also guided by utility maximization and not pure profit

maximization, Demsetz (1983) argued that it was not clear that diffusion of ownership

would automatically have a detrimental effect. In fact, it has been argued that as the stake

of owner-managers increase, so does their ability to misallocate resources also increase.

They may act in their own interests at the expense of minority shareholders and other

investors. This effect is referred to as the entrenchment effect.

22 Agency costs are costs that arise from the principal-agent problem, i.e. divergence of managerial objectives from the objectives of shareholders

Structure of Ownership and Concentration

84

Another key aspect of corporate ownership structure is its composition, namely,

who are the shareholders, and more importantly, who are the controlling or significant

shareholders. A shareholder can be an individual, a family or family group, a holding

company, a bank, an institutional investor, or a non-financial corporation. A family or

family group as a significant shareholder is more likely to be interested in control benefits

as well as profits. On the other hand, an institutional investor as a significant shareholder

is more likely to be interested only in profits. Fama and Jensen (1983) demonstrated

various possibilities that managers who own enough stock to dominate the board of

directors could expropriate corporate wealth while Stulz (1988) explained how owning

large blocks of shares makes it easier for managers to be entrenched. Thus, greater stock

ownership by managers increases the power of internal constituency, but decreases the

power of the external constituency in influencing corporate performance.

Generally, the problem of corporate governance arises because of the separation

of ownership and control. This agency or moral hazard problem can arise not just

between shareholders and managers, but also between controlling and minority

shareholders, between shareholders and creditors, and between controlling shareholders

and other stakeholders, including suppliers and workers. A sound corporate governance

system should provide effective protection for shareholders and creditors such that they

can assure themselves of getting a return on their investment. It should also help to create

an environment conducive to the efficient and sustainable growth of the corporate sector.

The objective of this chapter is to describe the basic ownership characteristics of

selected Indian companies, compare them with existing national evidence, and to suggest

possible reasons and their implications for corporate governance.

Structure of Ownership and Concentration

85

3.1 Results and Analysis This section is divided in two sub-sections: sub-section 1 presents the ownership structure

statistics of the sample companies. The ownership concentration is quantified in sub-

section 2.

3.1.1 The Structure of Corporate Ownership Table 3.1 shows how the ownership of the sample companies in the aggregate breaks

down between various categories of shareholders as of the end of the financial years over

the study period 2000-01 to 2005-06. It is apparent that on an average the promoters held

around 46 percent of the total outstanding shares from 2001 to 2006, in which the

proportion held by the Indian promoters was considerably high. There was a dip in the

share of persons acting in concert in 2006. In the case of non-promoters holding their has

been an increase in the share of the institutions from 21 percent as on 31 March 2001 to

28 percent on 31 March 2006 while a decrease for the non-institutions from 34 percent to

27 percent over the same time. The proportion of outstanding shares held by the banks,

financial institutions, insurance companies, corporate bodies and individuals have

decreased in the same period. The share of ‘others’ i.e., shares in transit (NSDL and

CDSL), GDR’s, non-domestic company, international finance corporate, foreign

companies, non-promoter director, trust, foreign national, foreign bank etc. has increased

from 3 percent in 2001 to 5 percent in 2006. It is very forthcoming that during the six-

year period, the share of foreign institutional investors has phenomenally increased by

164 percent followed by foreign promoters by 9 percent. This increasing participation is

indicative of India’s improving macroeconomic fundamentals, increasing corporate

profitability and competitiveness, and greater integration with the world economy. Thus,

Structure of Ownership and Concentration

86

overall although the share of promoters vis-à-vis non-promoters have not changed

markedly, there is certainly a change in the distribution of the shareholding amongst its

constituents.

Table 3.1: Ownership Structure (as of the end of FY, percentage of outstanding shares owned)

Category Category of Shareholder 2001 2002 2003 2004 2005 2006 1 Promoters Holding 45.08 46.24 48.61 46.66 46.22 45.60 1.1 Indian Promoters 30.27 31.43 33.24 31.20 30.71 30.69 1.2 Foreign Promoters 11.76 11.73 12.13 12.15 12.45 12.86 1.3 Persons Acting in Concert 3.05 3.08 3.24 3.31 3.06 2.05 2 Non-Promoters Holding 54.92 53.76 51.39 53.34 53.78 54.40 2.1 Institutions 21.10 20.21 19.43 23.51 24.99 27.78 2.1.1 Mutual Funds/UTI 6.42 5.48 4.76 5.10 5.05 5.62 2.1.2 Banks, FI’s, Insurance

Companies 9.11 9.42 9.75 8.64 7.95 7.46 2.1.3 Foreign Institutional

Investors 5.57 5.31 4.92 9.77 11.99 14.70 2.2 Non-Institutions 33.82 33.55 31.96 29.83 28.79 26.62 2.2.1 Corporate Bodies 8.48 8.28 6.86 7.08 7.01 6.40 2.2.2 Individuals (Indian public) 22.35 22.30 21.80 18.96 17.24 15.11 2.2.3 Othersa 2.99 2.97 3.30 3.79 4.54 5.11 a ‘Others’ include shares in transit (NSDL and CDSL), GDR’s, non-domestic company, international finance corporate, foreign companies, non-promoter director, trust, foreign national, foreign bank etc.

The ownership structure of the sample companies in 2006 by industry type23,

namely, manufacturing and services is shown in Table 3.2. There is a difference in the

shareholding pattern of companies in different industries in terms of the proportion of

shares held by promoters re non-promoters. While the share of promoters holding was 47

percent for manufacturing companies, it was only 41 percent in the case of service

companies. In 2006, the Indian promoters held the highest proportion of outstanding

shares irrespective of the industry type with the share for the service companies touching

35 percent. However, the proportion of foreign promoters was significantly less for the

23 The industry classification as provided by the PROWESS database.

Structure of Ownership and Concentration

87

Table 3.2: Ownership Structure by Industry Type (as of the end of 2006)

Industry Type

No. of Companies

Promoters Holding (%)

Non-Promoters Holding (%)

Indian Promoters

Foreign Promoters

Persons Acting in Concert

Institutionsa Non- Institutionsb

Manufacturing 109 29.69 14.83 2.14 26.83 26.51 Service 25 35.08 4.27 1.65 31.90 27.10 All Companies 134 30.69 12.86 2.05 27.78 26.62

a Institutions include mutual funds, UTI, banks, financial institutions, insurance companies and foreign institutional investors. b Non-Institutions include private corporate bodies, Indian public, NRI/OCB and any other person.

service companies at 4 percent in comparison to the manufacturing companies which

stood at 15 percent. In the case of holdings of non-promoters, the share of institutions

(26.83%) as well as the non-institutions (26.51%) was almost the same for the

manufacturing sector (Chart 3.1); whereas in the case of the service sector (Chart 3.2)

institutions owned a higher proportion of outstanding shares (31.90%) than the non-

institutions (27.10%).

Chart 3.1: Ownership Structure for Manufacturing Companies (as of the end of 2006)

30%

15%

2%

27%

26%

Indian Promoters

Foreign Promoters

Persons Acting in Concert

Institutions

Non- Institut ions

Structure of Ownership and Concentration

88

Chart 3.2: Ownership Structure for Service Companies

(as of the end of 2006)

35%

4%

2%32%

27%

Indian Promoters

Foreign Promoters

Persons Act ing in Concert

Inst itutions

Non- Institutions

The results thus show that foreign investment in service vis-à-vis manufacturing

sector was low. Even though, most sectors of the Indian economy are now at least

partially open to foreign investment, foreign direct investment (FDI) is concentrated

largely in the manufacturing, utilities, and banking sectors. Manufacturing contributes 79

percent of the FDI24. This is primarily because the Indian government continues to

prohibit FDI in certain politically sensitive sectors, such as agriculture, retail trading, and

real estate. Foreign investment is still relatively controlled with various government

approvals required for many types of investments. While a key reform has allowed

automatic FDI approval in many industries, including bulk manufacturing activities, other

sectors still require approval by government agencies.

Table 3.3 provides an insight into the range of shareholdings and changes in the

same for various categories of investors from 2001 to 2006. Best practice calls for

24 http://www.ustr.gov/assets/Document_Library/Reports_Publications/2006

Structure of Ownership and Concentration

89

significant ownership (ownership exceeding 35%) to be deemed as control (McGee,

2008).

Table 3.3: Shareholding Pattern* (as of the end of FY)

Panel A: Shares Held by Various Categories of Shareholders (no. of companies)

Promoters Holdings Non-Promoters Holdings Indian

Promoters Foreign

Promoters Persons acting

in concert Institutionsa Non-

Institutionsb

Range of

shareholding (%) 2001 2006 2001 2006 2001 2006 2001 2006 2001 2006

Less than 5 34 32 97 96 117 121 18 7 0 0 5-20 13 14 5 6 8 7 46 33 18 41 20-35 33 32 5 4 5 4 54 58 60 66 35-50 23 25 6 5 3 2 13 27 37 20

50 and above 31 31 21 23 1 0 3 9 19 7 Panel B: Change in the Shareholding (no. of companies)

Promoters Holdings Non-Promoters Holdings Change in Share

(percentage points)

Indian Promoters

Foreign Promoters

Persons acting in concert

Institutionsa Non- Institutionsb

Decline Less than or equal to -5

28 8 10 22 71

-5 to -1 22 6 9 10 29 -1 7 3 13 9 3 Total declines 57 17 32 41 103

No Change 26 93 86 0 0 Increase

Up to 1 8 1 7 3 3 1 to 5 14 10 4 16 11 More than 5 29 13 5 74 17 Total increases

51 24 16 93 31

* n=134 a Institutions include mutual funds, UTI, banks, financial institutions, insurance companies and foreign institutional investors. b Non-Institutions include private corporate bodies, Indian public, NRI/OCB and any other person.

Panel A points to the fact that there was only a marginal increase in 2006 vis-à-vis

2001 in the number of companies wherein promoters (both Indian and foreign) held more

than 35 percent stake. The institutions considerably consolidated their holdings in Indian

companies in 2006 with stakes going up above 35 percent for 36 companies from just 16

companies in 2001. However, there was a considerable fall in the significant shareholding

of non-institutions with only 27 companies in 2006 down from 56 companies in 2001.

Structure of Ownership and Concentration

90

There was a considerable increase from 18 to 41 companies from 2001 to 2006 in

the shareholding of non-institutions in the range of 5-20 percent. For the same range of

holding there was a fall in share of institutions from 46 in 2001 to 33 companies in 2006.

For approximately 90 percent of the sample companies the shareholding of persons acting

in concert with the promoters was less than 5 percent.

Panel B shows that there was no changes in the foreign holding of 93 companies

from 2001 to 2006. Similarly, persons acting in concert and the Indian promoters for 86

and 26 companies respectively have retained their shareholding. The non-promoters

holding of shares in the sample companies were in a continuous flux for the study period.

The overall declines in the shareholding were the highest for non-institutions (103

companies) and lowest for foreign promoters (17 companies). The total increases on the

other hand were highest for institutions (93) and lowest for persons acting in concert (16

companies). The largest fall of less than or equal to -5 percent points was in the share of

non-institutions (71 companies) while the largest gain of more than 5 percent points was

in the share of institutions (74 companies).

It can be observed that for the most part of the sample companies there has been a

marked shift from shareholding by private corporate bodies, Indian public, NRI/OCB etc.

to shareholding by the financial sector i.e. mutual funds, UTI, banks, financial

institutions, insurance companies and foreign institutional investors. Although there are

regulatory restrictions prohibiting banks, mutual funds, insurance and foreign

institutional investors holding large stakes in individual companies yet due to gradual

relaxations of limits on investment as well as conscious effort to promote investments by

the government have made it possible for the financial institutions to consolidate their

shareholding.

Structure of Ownership and Concentration

91

3.1.2 The Ownership Concentration Large owners make up the extreme right tail of the distribution of equity stakes in a

company. The most common way of quantifying concentrated ownership is by the equity

stake held by one or more of the large investors. Panel A of Table 3.4 reports the average

stake of the largest, the second, and the third largest owner for a sample of 123

companies. The two columns to the right show that the largest owner in a company held

26 percent of the equity on an average. This investor owned 2.6 times more than the

second largest (10.01%), and the difference between consecutive holdings decreases as

we move down the ranking list. The cumulative holding implies that on average, the two

largest owners may collectively form a blocking super-majority (1/3). This concentration

Table 3.4: Equity Fractions Held by Large Shareholders, 2000-06

Panel A: Shares Owned by the Three Largest Shareholders (n = 123a) Industry Type

Manufacturing (102 companies)

Service (21 companies)

All (123 companies)

Owner

size rank Mean Cumulative Mean Cumulative Mean Cumulative

1 26.43 26.43 22.37 22.37 25.73 25.73 2 9.88 36.31 10.63 33.00 10.01 35.74 3 6.34 42.65 7.39 40.39 6.52 42.26

Panel B: Shares Owned by the Five Largest Shareholders (n = 106 b) Industry Type

Manufacturing (86 companies)

Service (20 companies)

All (106 companies)

Owner

size rank Mean Cumulative Mean Cumulative Mean Cumulative

1 24.53 24.53 21.58 21.58 23.98 23.98 2 10.12 34.65 10.63 32.21 10.21 34.19 3 6.80 41.45 7.34 39.55 6.90 41.09 4 5.01 46.46 4.02 43.57 4.82 45.91 5 3.80 50.26 3.18 46.75 3.69 49.60

a The data for the equity fractions held by the three largest shareholders is unavailable for 11 companies. b The data for the equity fractions held by the five largest shareholders is unavailable for 28 companies.

pattern prevails to a larger extent across manufacturing (36.31) than the service industry

(33.00).

Structure of Ownership and Concentration

92

Panel B of Table 3.4 provides the average stake of the largest, the second, the

third, the fourth and the fifth largest owner for a sample of 106 companies. The two

columns to the right show that the largest owner in a company held 24 percent of the

equity on an average. This investor owned 2.4 times more than the second largest

(10.21%), and the difference between consecutive holdings decreases as we move down

the ranking list. The cumulative holding implies that on average, the two largest owners

may collectively form a blocking super-majority (1/3), and a coalition of the five largest

owners may close to a majority (1/2). For instance, the five largest owners have a 50

percent shareholding. This concentration pattern prevails well more across the

manufacturing (50.26) than the service companies (46.75). It can be therefore discerned

from the preceding analysis that with a limited contestability of control25, a typical

investor neither has the incentive nor the power to be of independent importance in

corporate governance.

Table 3.5 documents how often each investor type is the largest, second, third,

fourth, and fifth largest owner for the period 2000-2006. The Indian promoters have the

highest stake in 54 percent of all cases, and were also more often than any other owner

type the second (51%), third (43%), fourth (39%) and the fifth (31%) largest. Moreover,

the higher the rank of a large holding, the higher is the probability that its owner is an

Indian promoter. The foreign promoters held the second highest stake in 21 percent of

cases for the largest owner size rank and were also the third largest in 7 percent of cases

for the second rank. The insurance companies have second highest stake for owner size

rank second (19%), third (17%), fourth (18%) and the fifth (21%). The foreign

institutional investors have the third highest stake in 12 percent, 15 percent and 17 25 No contestability if the largest shareholders hold more than 50 percent of voting rights.

Structure of Ownership and Concentration

93

percent of all cases for owner size rank third, fourth and the fifth respectively. They also

have the fourth highest holding in 5 percent of cases for the second owner size rank.

Furthermore, the fourth highest stakes have been held by ‘Others’ for largest owners size

rank, UTI for the third as well as fourth rank and corporate bodies for the fifth rank. The

individuals were the least significant investor type in terms of large stakes. The

probability that a big investor is an individual is around 1 percent regardless of size rank.

The same also holds good to a very large extent for mutual funds, banks, financial

institutions and ‘others.’

Table 3.5: Propensity to Hold Large Equity Stakes (n=106)

Owner Size Rank Owner Type 1 2 3 4 5

Indian Promoters 53.93 50.79 42.77 39.15 31.13 Foreign Promoters 21.38 7.39 4.24 2.04 1.10 Persons Acting in Concert 3.61 3.15 5.82 5.50 5.35 Mutual Funds 0.00 0.31 1.26 3.15 3.46 UTI 2.20 5.03 9.75 6.92 7.08 Banks 1.89 0.63 1.26 0.94 1.10 Financial Institutions 0.16 3.77 0.94 0.00 0.94 Insurance Companies 8.17 19.34 17.29 18.08 20.91 Foreign Institutional Investors 1.58 5.19 11.95 15.41 17.45 Corporate Bodies 3.31 3.30 2.99 5.35 7.39 Individuals (Indian public) 0.00 0.16 0.47 2.52 2.99 Othersa 3.77 0.94 1.26 0.94 1.10

a ‘Others’ include shares in transit (NSDL and CDSL), GDR’s, non-domestic company, international finance corporate, foreign companies, non-promoter director, trust, foreign national, foreign bank etc.

To summarize, the overwhelming majority of large owners have been promoters

(Indian as well as foreign) followed by insurance companies and foreign institutional

investors. This reveals that the management teams of companies under study were

primarily monitored by their promoters. Thus, there exists a simple principal-agent

relationship with hardly any role of delegated monitoring. This setting illustrates that, in

Structure of Ownership and Concentration

94

addition to holding size per se, the identity of the holder may matter for corporate

governance. For instance, what is very forthcoming from the above analysis is the role

insurance companies can play in active monitoring of companies. However, the same

cannot be expected from individuals who have minority shareholding.

Table 3.6 shows that the concentration indicators increased marginally from 2001

to 2006. An analysis of 123 companies revealed that shares held by the top three

investors (T3) increased from 41 percent in 2001 to around 42 percent in 2006. The

Herfindal index (H3) too increased from 0.105 in 2001 to 0.114 in 2006. A similar

analysis on a sample of 106 companies confirmed that the ownership concentration

increased by both measures. The share of top five investors (T5) increased from 48

percent in 2000 to 49 percent in 2006 while the Herfindal index (H5) increased from

0.097 to 0.103 over the said time. It can be observed that there is a drop in the share of

top three and five shareholders during 2003-04 and 2004-05.

Table 3.6: Concentration Indicators (standard deviation in parentheses)

Indicators 2001 2002 2003 2004 2005 2006 Share of top 3 shareholdersa (%) 40.818

(17.048) 42.371

(17.391) 43.536

(17.314) 42.579

(16.937) 42.270

(17.132) 42.003

(17.351) Herfindal Index (H3) 0.105

(0.115) 0.110

(0.107) 0.115

(0.106) 0.111

(0.105) 0.112

(0.113) 0.114

(0.117) Share of top 5 shareholdersb (%) 48.334

(16.200) 50.411

(16.368) 51.047

(15.949) 49.629

(15.397) 49.123

(15.464) 49.038

(15.690) Herfindal Index (H5) 0.097

(0.101) 0.106

(0.094) 0.107

(0.090) 0.102

(0.087) 0.102

(0.093) 0.103

(0.097) a The data for shares held by the three largest shareholders is available for 123 companies.

b The data for shares held by the five largest shareholders is available for 106 companies.

Overall the results highlight that the ownership concentration increased for the

average company over time. With the largest five owners holding majority shareholding,

the possibility of existence of a market for corporate control is doubtful.

Structure of Ownership and Concentration

95

3.2 Discussion and Conclusion Empirical evidence presented in this study underlines the importance of ownership

structure both in terms of distribution and the types of large shareholders for corporate

governance. The ownership structure was mapped out for BSE 200 Index companies for

six financial years from FY 2000-2001 to FY 2005-2006.

Consistent with some recent studies (Patibandla, 2006; and Mittal and Kansal,

2007) the data supports the findings that companies in India, unlike several other

emerging markets, typically maintain their shareholding pattern over time. This is

especially true for the overall proportion of shares held by promoters and non-promoters.

In India, ownership is concentrated with Indian promoters, thus the traditional

culture of big corporate family owned houses prevail (Bertrand et al., 2002; Topalova,

2004; Sarkar and Sarkar, 2005; and Rao and Guha, 2006). On an average the Indian

promoters together with persons acting in concert held around 34 percent of the total

outstanding shares from 2001 to 2006. Furthermore, Indian promoters have the highest

stake in 54 percent of all cases, and were also more often than any other owner type the

second, third, fourth and the fifth largest. The foreign promoters held around 12 percent

shareholding for the said period. The ownership structure by industry type for 2006

corroborated a shareholding of 32 percent and 37 percent respectively for manufacturing

and service sector by the Indian promoters in concert with other persons. Additionally,

the proportion of shares held by foreign promoters was significantly less for the service

companies in comparison to the manufacturing companies. Overall, the results reveal that

the management teams of companies under study were primarily monitored by their

promoters.

Structure of Ownership and Concentration

96

Although India has a tradition of equity ownership by promoters, a phenomenon

of institutionalization of wealth wherein institutional investors especially foreign

institutional investors are consolidating their holdings is quite apparent from the study.

During the six-year period, the share of foreign institutional investors has phenomenally

increased by 164 percent. This is the outcome of the persistent efforts of the Indian

government to open its markets to trade and investment. In the 1998/99 budget, foreign

institutional investors were allowed for the first time to invest in Indian primary and

secondary markets. The equity caps for foreign portfolio investment are generally

identical to the FDI equity caps, with the exception of a few specific sectors. Foreign

institutional investors tend to operate on the principle of portfolio diversification with

typically no other relation to the company except for their financial investment. In

addition, the share of ‘others’ i.e., shares in transit (NSDL and CDSL), GDR’s, non-

domestic company, international finance corporate, foreign companies, non-promoter

director, trust, foreign national, foreign bank etc. has increased from 3 percent in 2001 to

5 percent in 2006. Similar results have been reported by Mittal and Kansal (2007)

wherein they state that this growth of shareholding is expected to have a pervasive

influence on corporate governance.

Evidence shows insignificant shareholding of individuals in the sample

companies. Apparently, these listed companies suffer from the traditional free-ride

problem26. Individual shareholders have no incentive and no capability to monitor and

influence the behaviour of the management. Furthermore, the proportion of outstanding

shares held by banks, insurance companies, and corporate bodies have decreased from

26 The free rider problem refers to a situation where some individuals in a population either consume more than their fair share of a common resource, or pay less than their fair share of the cost of a common resource.

Structure of Ownership and Concentration

97

2001 to 2006. In contrast to findings on other emerging economies in Asia, affiliations

with banks and institutions are not a pronounced feature of Indian corporates.

The results highlight that the ownership concentration both in terms of the

fraction of shares held by the largest shareholders and Herfindal index increased for the

average company over the study period. The cumulative holding underlines that on an

average, the two largest owners collectively neared a blocking super-majority and a

coalition of the five largest owners closed to almost a majority. It is, therefore,

contentious as to the extent efforts at improving corporate governance would succeed in

face of high equity stakes in hands of few owners.

Listed companies’ corporate governance practices are likely to be influenced by

the rules, in particular how and to what degree the rules are enforced. The framework for

all corporate activities including the strong recognition of shareholder rights, institutional

ownership of wealth, the tradition of strong legal regulation of securities markets and

lately heavy insistence on transparency in accounting has been fairly stable in India. The

regulatory bodies have advocated comprehensive and rigorous corporate governance

reforms through the formulation of Clause 49 of Listing Agreements. Although there are

regulatory restrictions on investors’ holding stakes in individual firms yet it has not led to

dispersed holdings. The reasons for high concentration of shareholding can be traced to

poor political stability, regulatory quality and widespread corruption. Concentrated

ownership puts a much smaller burden on the legal enforcement system and relies on

relatively simple judicial interventions. Further, the corporate governance reforms in

India have mainly focused on internal governance mechanisms. As such there is absence

of the phenomenon of activism by major institutional investors as a factor influencing

change in corporate governance.

Structure of Ownership and Concentration

98

With the promoters having huge stakes, it is, therefore, doubtful whether efforts at

improving corporate governance would succeed. In fact, the present ownership pattern

poses no threat to incumbent management of majority of companies. Despite recent

improvements laws governing corporate oversight, the enforcement of the laws needs to

be strengthened, standards for disclosure tightened, and penalties for violations raised.

As in all research into the issue of corporate governance, more caution should be taken to

explain the results, which should be understood in a suggestive rather than a decisive

way. Studies on corporate governance in India are still at their initial stage, and more

relevant factors for corporate concentration need to be identified. This issue and many

others need to be tested in future studies.

Ownership Structure, Corporate Governance and Performance

99

Chapter 4

EFFECTS OF OWNERSHIP STRUCTURE ON CORPORATE GOVERNANCE AND

PERFORMANCE

here is a large and rapidly growing body of the literature studying the impact of

ownership structure on firm performance. Most of the literature considers that

corporate ownership structure has a significant effect on corporate governance and

performance. Following the early work by Berle and Means (1932) and until the eighties,

this literature has focused on the advantages of ownership concentration. The main

concern was the cost of the separation of ownership and control, or the agency costs

(Jensen and Meckling, 1976; and Fama and Jensen, 1983). The idea is that dispersed

ownership in large firms increases the principal-agent problem due to asymmetric

information and uncertainty. Since the contracts between managers and shareholders are

unavoidably incomplete, shareholders must monitor managers. There is a widespread

consensus that a higher degree of control by an external shareholder enhances

productivity performance (Shleifer and Vishny, 1986). When the equity is widely

dispersed, shareholders do not have appropriate incentives to monitor managers who, in

turn, can expropriate investors and maximize their own utility instead of maximizing

shareholder value. Concentrated ownership in the hands of outsiders is also often

advocated on the ground that it facilitates the provision of capital.

More recently, the focus of the literature has shifted and several theories have

been proposed to show the ambiguity of the effect of ownership concentration. La Porta

et al. (1998) show that, in the majority of countries, large corporations have large

T

Ownership Structure, Corporate Governance and Performance

100

shareholders who are active in corporate governance. Consequently, they argue,

monitoring managers is not the main problem of corporate governance and the real

concern is the risk of the expropriation of minority shareholders. A similar view has been

expressed in the review of corporate governance in continental European countries

(Becht and Roell, 1999). In most of the countries studied, companies have large

shareholders and the main conflict of interest lies between them and minority

shareholders. On the other hand, dispersed ownership may have a beneficial impact on

firm performance. If concentrated ownership provides incentives to control the

management, it may also reduce the manager’s initiative or incentives to acquire

information (Aghion and Tirole, 1997). In this perspective, Burkart et al. (1997) view

dispersed ownership as a commitment device ensuring that shareholders will not exercise

excessive control. If the principal is concerned with providing the manager with the

guarantee of non-intervention, he may choose not to verify the action of management.

Such inefficient monitoring technology may stimulate managerial activism (Cremer,

1995), creating, ex-ante, powerful incentives for the management.

Moreover, dispersed ownership implies higher level of stock liquidity which, in

turn, improves the informational role of the stock market (Holmström and Tirole, 1993).

Using the stock exchange as the source of information is particularly important, again, in

the situation of high uncertainty (Allen, 1993), or when it is essential to ensure that the

management of underperforming firms changes hands. Finally, concentrated ownership is

costly for large shareholders because it limits diversification and reduces the owners’

tolerance towards risk (Demsetz and Lehn, 1985; and Heinrich, 2000). Ownership

dispersion allowing greater risk diversification may positively affect investment

decisions. Allen and Gale (2000) conclude that in the second best world of incomplete

Ownership Structure, Corporate Governance and Performance

101

contracts and asymmetric information, separation of ownership and control may be

optimal for shareholders. Overall, however, the existing economic theory does not offer a

clear prediction of the concentration-performance relationship. It is claimed that the issue

is not whether ownership concentration per se is desirable or not, rather it is how often

and at what points in firm’s life ownership should be concentrated (Bolton and Von

Thadden, 1998).

This chapter attempts to examine empirically the effect of corporate ownership

structure on corporate governance and performance. In addition, an attempt is made to

discern the impact of board characteristics such as size and composition on corporate

performance.

4.1 Results and Analysis 4.1.1 Descriptive Statistics

Summary statistics relating to the variables used in the analysis of 117 sample companies

for study period FY 2003-2004 to FY 2005-2006 is given in Table 4.1. The table reveals

that the mean IND_PROM ownership level for the sample is 31.72 percent, followed by

NON_INST with 27.68 percent, INST with 26.64 percent, and FOR_PROM with 11.52

percent. The sample includes large as well as small companies with respect to sales. The

ownership concentration (mean 0.11) varies between 0.00 and 0.55. The average number

of directors on the board is 10 with a maximum of 17 and a minimum of 4 directors. The

average proportion of independent directors on the board is 53.90 percent with the

minimum and maximum varying between 8 percent and 100 percent. The mean

TOBINS_Q is 2.72. The mean ROA is 15.55 percent with a maximum of 74 percent and

minimum of -16 percent. It reinforces the fact that wide variation exists in the sample.

Ownership Structure, Corporate Governance and Performance

102

Table 4.1: Descriptive Statistics of the Variables entered into Regression Analyses (N=117)

Minimum Maximum Mean Standard Deviation

TOBINS_Q .52 18.09 2.7223 2.07396 ROA -.16 .74 .1555 .10707 IND_PROM .00 87.15 31.7198 22.95844 FOR_PROM .00 73.55 11.5184 21.27387 INST .07 74.07 26.6421 13.95739 NON_INST 5.18 78.09 27.6836 13.13796 OWN_CONC .00 .55 .1107 .10877 B_SIZE 4.00 17.00 9.9516 2.41435 B_COMP .08 1.00 .5390 .14658 AGE 4.00 127.00 41.4786 24.75304 SIZE 4.93 11.40 7.3763 1.04412 IND .00 1.00 .8291 .37699 LEV .00 .99 .6941 .33411 GROWTH .00 .17 .0116 .02574 RISK .35 1.56 .9471 .26973

The results from the t-test for the change in ownership structure during the sample

period can be observed from Table 4.2. There are significant changes in shareholding of

institutions and non institutions for sub-periods as well as over time. Taking 2003-2006

as example, the p-values for t-test for INST is 5.787 implying that institutional ownership

significantly changed between 2003 and 2006. The ownership of all other categories did

not significantly change for common set of companies during the sample period. Overall,

since the ownership do change over time, supporting the use of Fixed Effect Panel Data

Models.

Table 4.2: T-test for Changes in Ownership over Time

Category of Shareholders Years IND_PROM FOR_PROM INST NON_INST

2003-05 -.637 .852 2.795** -1.648 2004-06 -.030 -1.598 5.247*** -3.786*** 2003-06 -.437 .557 5.787*** -3.977***

*** Significant at the 0.001 level (2-tailed). ** Significant at the 0.01 level (2-tailed).

Ownership Structure, Corporate Governance and Performance

103

Table 4.3 presents a Pearson correlation between independent variables and

dependent variables. There two dependent variables, TOBINS_Q and ROA have a

significantly positive correlation (Pearson correlation coefficient = 0.621). As for

independent variables, IND_PROM and FOR_PROM (Pearson correlation coefficient =

-0. 580), FOR_PROM and OWN_CONC (Pearson correlation coefficient = 0.621), and

FOR_PROM and LEV (Pearson correlation coefficient = -0.536) have significant

correlations. For all other variables the correlations are small in magnitude, and the

absolute correlation coefficients are less than 0.50. Overall, the correlation analysis

suggested that multicollinearity was not a significant problem in subsequent regression

analyses.27

4.1.2 Results of Ownership Structure and Performance

To understand the effect of ownership structure i.e., Indian Promoters, Foreign

Promoters, Institutions and Non-institutions on performance, multivariate regression

analyses was conducted.

The relationship of ownership structure and corporate performance was tested for

the financial years ending 2004, 2005 and 2006. The relationship between ownership

structure (each for IND_PROM, F_PROM, INST, and NON_INST) were first tested as

an independent variable and company performance (ROA) as a dependent variable

(Model 1). Six variables (AGE, SIZE, IND, LEV, GROWTH and RISK) were then

entered as control variables (MODEL 2). The control variables were entered in this way

so that the stability of the regression coefficients of the main independent variables could

be assessed (Tsui et al., 1992).

27 As a rule, multicollineraity is considered harmful only when they exceed 0.80 (Field, 2000).

Ownership Structure, Corporate Governance and Performance

104

Table 4.3: Correlations of the Variables entered into Regression Analyses

** Correlation is significant at the 0.01 level (2-tailed).

* Correlation is significant at the 0.05 level (2-tailed).

TOBINS_Q ROA IND_PROM FOR_PROM INST NON_INST OWN_CONC B_SIZE B_COMP AGE SIZE IND LEV GROWTH RISK

TOBINS_Q 1

ROA .621** 1

IND_PROM -.017 -.171* 1

FOR_PROM .226** .336** -.580** 1

INST .076 .056 -.366** -.236** 1

NON_INST -.358** -.228** -.274** -.278** -.087 1

OWN_CONC .216* .184** -.091 .621** -.298** -.430** 1

B_SIZE -.061 .045 -.182** -.169** .304** .220** -.307** 1

B_COMP -.108* -.191* .301** -.460** .116* .076 -.249** -.115* 1

AGE -.034 .079 -.281** .105* .241** .013 -.055 .123* -.141** 1

SIZE -.017 .121* -.134* -.120* .313** -.014 -.125* .343** .065 .261** 1

IND -.109* .089 -.113* .126* -.109* .049 .052 .088 -.086 .218** .159** 1

LEV -.465** -.400** .270** -.536** .094 .212** -.333** .158** .266** .007 .243** .157** 1

GROWTH .099 -.055 .180* -.120* -.055 -.035 .091 -.042 .183** -.179** -.065 .166** .130* 1

RISK -.455** -.368** .197** -.264** -.104 .187** -.166** -.011 .054 -.024 .065 -.108* .339** -.186** 1

Ownership Structure, Corporate Governance and Performance

105

Table 4.4 reports the results from cross-sectional regressions. The results vary

across years in case of ownership variables. Foreign ownership (F_PROM) has a

significant and positive impact on corporate performance (ROA) in 2004 as well as 2005.

The control variables were then entered in a way so that the stability of the regression

coefficients of the main independent variables could be assessed. The results suggest that

controlling for the six variables, promoters (Indian and foreign) ownership does have a

positive effect on return on assets (ROA) in 2004. The higher the promoters’ ownership,

the higher is the performance. Institutions (INST) also have a significant positive effect

on performance in 2005. The results show that size (SIZE) had a significant positive

while risk (RISK) a significant negative effect on performance for all the years. Leverage

(LEV) had significant negative effect in 2005 and 2006. The cross-sectional results

indicate that an ownership variable, foreign promoter has a consistently significant effect

on performance as measured by return on assets.

Using the same approach, the effects of ownership structure on firm profitability

as measured by tobin’s q (TOBINS_Q) was also tested. Table 4.4 shows that foreign

ownership (F_PROM) has a significant and positive impact on performance in 2004. No

ownership variable has been found to have a significant effect on performance in 2005

and 2006. None of the ownership variables had any significant effect on the tobin’s q

when six control variables (AGE, SIZE, IND, LEV, GROWTH and RISK) were entered.

Leverage (LEV) and risk (RISK) variables have a significant negative effect on

performance for all the years. Size (SIZE), on the other hand had a significant positive

effect in 2005 and 2006.

Ownership Structure, Corporate Governance and Performance

106

Table 4.4: Ownership Structure and Performance: Cross-sectional Regression (N=117)

Model 1 Model 2 Model 1 Model 2 Independent

Variables Dependent Variable: ROA Dependent Variable: TOBINS_Q 2004

IND_PROM .413 (1.620)

.548* (2.257)

.418 (1.667)

.371 (1.894)

FOR_PROM .681** (2.833)

.643** (2.750)

.524* (2.230)

.261 (1.382)

INST .246 (1.360)

.202 (1.176)

.234 (1.319)

.045 (.323)

NON_INST .090 (.538)

.192 (1.232)

-.127 (-.777)

-.071 (-.562)

Control Variables AGE -.027

(-.303) .017

(.237) SIZE .227*

(2.449) .247***

(3.297) IND .123

(1.349) -.065

(-.890) LEV -.141

(-1.388) -.353***

(-4.292) GROWTH .009

(.104) .210**

(3.004) RISK -.321***

(-3.535) -.390***

(-5.332) Overall Model F 5.677*** 5.459*** 7.284*** 14.067*** Adjusted R Square .139 .278 .178 .530 Standard Error

1.089 .082 1.246 .942

2005 IND_PROM .291

(1.072) .517

(1.950) .330

(1.206) .314

(1.330) FOR_PROM .600*

(2.336) .564*

(2.247) .432

(1.673) .170

(.759) INST .348

(1.812) .366*

(1.993) .316

(1.639) .199

(1.214) NON_INST .068

(.370) .235

(1.321) -.099

(-.536) -.016

(-.099) Control Variables AGE

-.016 -.036

(-.444) SIZE .269**

(2.905) .116

(1.409) IND .082

(.894) -.152

(-1.860) LEV -.336**

(-3.164) -.389***

(-4.118) GROWTH -.073

(-.827) .109

(1.338) RISK -.192*

(-2.063) -.358***

(-4.328) Overall Model F 5.298*** 4.720*** 4.941*** 8.738*** Adjusted R Square .129 .243 .120 .2400 Standard Error .109 .102 1.636 1.351 Contd..

Ownership Structure, Corporate Governance and Performance

107

Independent Variables

Model 1 Model 2 Model 1 Model 2

Dependent Variable: ROA Dependent Variable: TOBINS_Q 2006

IND_PROM .187 (.612)

.146 (.537)

.014 (.045)

-.115 (-.441)

FOR_PROM .504 (1.717)

.151 (.552)

.216 (.732)

-.216 (-.830)

INST .315 (1.490)

.221 (1.173)

.091 (.430)

-.038 (-.212)

NON_INST -.038 (-191)

-.038 (-.218)

-.285 (-1.443)

-.303 (-1.814)

Control Variables AGE -.013

(-.151) -.046

(-.517) SIZE .199*

(2.410) .104

(1.318) IND .100

(1.175) -.077

(-.954) LEV -.431***

(-4.181) -.459***

(-4.669) GROWTH -.077

(-.912) .031

(.382) RISK -.218*

(-2.505) -.303***

(-3.660) Overall Model F 5.689*** 6.634*** 5.354*** 8.353*** Adjusted R Square .139 .327 .131 .388 Standard Error 1.000 .088 2.085 2.085 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

The results of pooled OLS without any company, time dummy are reported in

Table 4.5. Foreign promoters (FOR_PROM) and institutional investors (INST) have a

significant positive effect on company performance (ROA). Further, controlling for the

six variables, Indian promoters (IND_PROM), foreign promoters (FOR_PROM) and

institutional investors (INT) have a significant positive effect on return on assets. The

results also show that leverage (LEV) and risk (RISK) have a significant negative while

size (SIZE) a significant positive effect.

Ownership Structure, Corporate Governance and Performance

108

Table 4.5: Ownership Structure and Performance: Pooled Regression, 2003-06

Model 1 Model 2 Model 1 Model 2 Independent

Variables Dependent Variable: ROA Dependent Variable: TOBINS_Q

IND_PROM .307 (1.958)

.414** (2.831)

.251 (1.604)

.196 (1.446)

FOR_PROM .602*** (4.044)

.466*** (3.274)

.385** (2.586)

.087 (.660)

INST .315** (2.841)

.275** (2.676)

.244* (2.210)

.114 (1.201)

NON_INST .050 (.483)

.142 (1.480)

-.161 (-1.553)

-.120 (-1.350)

Control Variables AGE -.016

(-.326) -.024

(-.526) SIZE .221***

(4.353) .157***

(3.332) IND .101*

(1.983) -.086

(-1.829) LEV -.298***

(-5.070) -.388***

(-7.120) GROWTH -.065

(-1.316) .090*

(1.979) RISK -.239***

(-4.655) -.308***

(-6.478) Overall Model F 15.983*** 15.524*** 16.338*** 23.683*** Adjusted R Square .146 .293 .149 .393 Standard Error .099 .090 1.913 1.616 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

The pooled regression results for tobin’s q (TOBINS_Q) show that foreign

promoters (FOR_PROM) and institutional investors (INST) ownership has a significant

positive effect. It was observed on including fixed effect control for company specific

variables that none of the ownership variables had any significant effect. The outcome

with regards to control variables was similar to that for return on assets.

To check whether ownership’s collinearity has anything to do with the obtained

results, use of each ownership group was made separately as shown in Table 4.6. The

results remain unchanged in term of foreign promoters (FOR_PROM) for performance as

measured by return on assets (ROA). Additionally, ownership by non-institutional

Ownership Structure, Corporate Governance and Performance

109

investors also has a significant negative effect. However, Indian promoters (IND_PROM)

have a significant positive effect and non-institutional investors (N_INST) a significant

negative effect at 0.001 level on corporate performance when measured as tobin’s q.

Table 4.6: Ownership Structure and Performance: Regression Analysis with Single Ownership at a Time

Dependent Variable Independent

Variables ROA TOBINS_Q IND_PROM .034

(.656) .165***

(3.463)

FOR_PROM .117* (2.072)

-.026 (-.477)

INST .010 (.197)

.034 (.706)

NON_INST -.113* (-2.402)

-.216*** (-4.997)

Control Variables

AGE -.005 (-.104)

-.018 (-.373)

-.014 (-.278)

-.010 (-.205)

-.003 (-.073)

-.035 (-.744)

-.043 (-.909)

-.033 (-.723)

SIZE .216*** (4.357)

.217*** (4.427)

.209*** (4.086)

.203*** (4.134)

.191*** (3.463)

.168*** (3.621)

.160 (3.316)

.151*** (3.363)

IND .102* (2.072)

.074 (1.481)

.101* (2.002)

.105* (2.145)

-.104* (-2.274)

-.115* (-2.417)

-.112 (-2.358)

-.110* (-2.447)

LEV -.381*** (-7.096)

-.311*** (-5.236)

-.374*** (-7.117)

-.351*** (-6.697)

-.433*** (-8.701)

-.404*** (-7.163)

-.395 (-7.993)

-.350*** (-7.281)

GROWTH -.064 (-1.277)

-.048 (-.969)

-.059 (-1.190)

-.064 (-1.309)

.090 (1.954)

.112* (2.386)

.115 (2.461)

.104* (2.312)

RISK -.260*** (-5.080)

-.247*** (-4.864)

-.254*** (-4.911)

-.242*** (-4.762)

-.348*** (-7.318)

-.328*** (-6.825)

-.320 (-6.562)

-.299*** (-6.421)

Overall Model F 19.109*** 19.875*** 19.031*** 20.168*** 30.107*** 27.485*** 27.546*** 33.000*** Adjusted R Square

.266 .274 .265 .277 .368 .346 .347 .390

Standard Error .092 .091 .092 .091 1.648 1.677 1.68 1.619 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Robustness Tests

To check the robustness of results obtained, certain restrictions were placed on the

sample properties in terms of years and reported results are presented in Table 4.7. The

results are reported for the first two financial years of observations (2003-2005) as well

as for the last two years (2004-2006). The coefficients associated with foreign promoters

(F_PROM) and institutional investors (INST) were significant when performance was

Ownership Structure, Corporate Governance and Performance

110

measured as return on assets (ROA) for 2003-05 as well as 2004-06. Additionally, Indian

promoters too had a significant and positive effect on return on assets. Indian promoters

(IND_PROM) had a significant positive effect and on corporate performance when

measured as tobin’s q (TOBINS_Q). The results also show that leverage (LEV) and risk

(RISK) have a significant negative while size (SIZE) a significant positive effect on

performance.

Table 4.7: Ownership Structure and Performance: Regression Results with Two Years Common Observations

Dependent Variable: ROA Dependent Variable: TOBINS_Q Independent

Variables 2003-05 2004-06 2003-05 2004-06 IND_PROM .524**

(2.953) .352

(1.902) .336*

(2.187) .119

(.688) FOR_PROM .590***

(3.484) .387*

(2.146) .208

(1.415) .005

(.029) INST .287*

(2.311) .305*

(2.369) .140

(1.297) .104

(.860) NON_INST .211

(1.808) .113

(.992) -.043

(-.422) -.151

(-1.319) Control Variables AGE -.021

(-.329) -.015

(-.242) -.013

(-.231) -.040

(-.707) SIZE .242***

(3.739) .229*** (3.770)

.172** (3.061)

.121* (2.121)

IND .103 (1.610)

.087 (1.415)

-.110* (-1.977)

-.101 (-1.752)

LEVERAGE -.246*** (-3.372)

-.370*** (-5.109)

-.367*** (-5.283)

-.418*** (-6.145)

GROWTH -.050 (-.817)

-.075 (-1.252)

.147** (2.775)

.062 (1.102)

RISK -.249*** (-3.876)

-.202*** (-3.235)

-.368*** (-6.609)

-.306*** (-5.216)

Overall Model F 9.504*** 11.209*** 20.146*** 15.703*** Adjusted R Square .267 .305 .451 .387 Standard Error .092 .093 1.169 1.798 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

To check for further robustness of results obtained for performance as measured

by return on assets (ROA), some other findings are reported in Table 4.8. In Column 1,

Ownership Structure, Corporate Governance and Performance

111

Table 4.8: Ownership Structure and Performance: Results of Fixed Effect Regression for Sub-samples

1 2 3 IND_PROM .430**

(2.811) .350*

(2.263) .389** (2.673)

FOR_PROM .465** (3.007)

.402** (2.664)

.397** (2.793)

INST .134 (1.308)

.207 (1.925)

.200 (1.944)

NON_INST .087 (.855)

.107 (1.078)

.136 (1.450)

Control Variables AGE .001

(.009) -.021

(-.404) .035

(.713) SIZE .207***

(3.689) .230*** (4.443)

.288*** (5.836)

IND - .071

(1.337) .013

(.272) LEV -.331***

(-4.623) -.319*** (-5.345)

-.297*** (-5.190)

GROWTH -.070 (-1.336)

-.068 (-1.369)

-.062 (-1.293)

RISK -.200*** (-3.320)

-.233*** (-4.471)

-.355*** (-7.061)

Overall Model F 16.269*** 14.442*** 19.596*** Adjusted R Square .322 .280 .354 Standard Error .087 .088 .071 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

companies belonging to manufacturing sector are considered for regression analysis. This

analysis assumes importance since the sample indicates that most (83%) of the companies

belong to this industry. The results hold good for foreign promoters (FOR_PROM) and

Indian promoters (IND_PROM) as was for the pooled regression analyses (Model 2).

Higher the promoters’ ownership, higher is the corporate performance measured as return

on assets. The results in addition show that leverage (LEV) and risk (RISK) have a

significant negative while size (SIZE) a significant positive effect on performance. In

column 2, companies with positive return on assets (ROA) have been considered for the

analysis. Yet again, foreign promoters (FOR_PROM) and Indian promoters

Ownership Structure, Corporate Governance and Performance

112

(IND_PROM) have a significant effect on return on assets. The results remain unchanged

for the three control variables, namely leverage (LEV), risk (RISK) and size (SIZE).

To mitigate the problem of outliers, the dependent variable (ROA) was restricted

to lie between 5 percent and 95 percent. Column 3 of Table 4.8 reports the results. The

results reiterate significant effect of foreign promoters (FOR_PROM) and Indian

promoters (IND_PROM). The results still show that leverage (LEV) and risk (RISK)

have a significant negative while size (SIZE) a significant positive effect on performance.

Inference

Overall, the results of the analyses indicate that the shareholding by promoters (both

Indian and foreign) have a significant impact on corporate performance. This is evidence

for the fact that higher promoters’ ownership, higher is the corporate performance. This

result is consistent with the results obtained by Chibber and Majumdar (1998, 1999),

Patibandla (2002), Douma et al. (2002), and Pattanayak (2008) while contrary to those of

Kumar (2004). The results of pooled regression analysis also confirm a significant effect

of institutional investors on performance. Non-institutional ownership variable does not

have a significant impact on performance. The results also show that some of the control

variables like leverage (LEV) and risk (RISK) have a significant negative while size

(SIZE) a significant positive effect on performance. Thus, the results support hypotheses

1(a-c) and 2(b, c).

4.1.3 Results of Ownership Structure and Governance

The relationship between ownership structure and ownership concentration was tested

first using cross-sectional regressions as in Li et al (2006). In this analysis, ownership

structure (each for IND_PROM, FOR_PROM, INST, and NON_INST) was first tested as

Ownership Structure, Corporate Governance and Performance

113

an independent variable and ownership concentration (ONC_CONC) as a dependent

variable (Model 1). Six variables (AGE, SIZE, IND, LEV, GROWTH and RISK) were

then entered as control variables (MODEL 2). The control variables were entered in this

way so that the stability of the regression coefficients of the main independent variables

could be assessed.

Table 4.9 shows foreign promoters (FOR_PROM) has a significant and positive

impact on ownership concentration (OWN_CONC) for all the years. The control

variables were next entered. The results yet again show that even controlling for the six

variables, ownership by foreign promoters does have a positive effect on ownership

concentration for the period under study. The results also show that none of the control

variables has any effect on ownership concentration. The cross-sectional results thus

Table 4.9: Ownership Structure and Concentration: Cross-sectional Regression of (N=117)

Model 1 Model 2 Independent Variables Dependent Variable: Ownership Concentration

2004 IND_PROM .293

(1.581) .261

(1.338) FOR_PROM .768***

(4.394) .771*** (4.105)

INST -.025 (-.188)

-.036 (-.265)

NON_INST -.175 (-1.443)

-.180 (-1.436)

Control Variables AGE -.026

(-.362) SIZE .040

(.542) IND -.038

(-.526) LEVERAGE -.032

(-.394) GROWTH .105

(1.508) RISK .055

(.759) Overall Model F 35.724*** 14.254*** Adjusted R Square .545 .533 Standard Error .069 .069 Contd…

Ownership Structure, Corporate Governance and Performance

114

2005 IND_PROM .211

(.988) .150

(.676) FOR_PROM .656**

(3.249) .672** (3.197)

INST -.076 (-.505)

-.079 (-.511)

NON_INST -.180 (-1.242)

-.205 (-1.374)

Control Variables AGE -.024

(-.312) SIZE -.008

(-.104) IND -.029

(-.374) LEVERAGE .048

(.541) GROWTH .180*

(2.447) RISK .018

(.227) Overall Model F 25.824*** 11.180*** Adjusted R Square .461 .467 Standard Error .082 .082

2006 IND_PROM .306

(1.276) .295

(1.199) FOR_PROM .749**

(3.243) .784** (3.177)

INST -.024 (-.144)

-.019 (-.111)

NON_INST -.126 (-.812)

-.117 (-.736)

Control Variables AGE -.035

(-.460) SIZE .036

(.481) IND -.025

(-.321) LEVERAGE .023

(.243) GROWTH .106

(1.402) RISK .006

(.074) Overall Model F 26.424*** 10.567*** Adjusted R Square .467 .452 Standard Error .083 .084 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Ownership Structure, Corporate Governance and Performance

115

indicate that results do not vary across years and it is only the shareholding of foreign

promoters that has a consistently significant effect on ownership concentration.

The relationship between ownership structure and board size was then tested

using cross-sectional regressions. In this analysis, ownership structure (each for

IND_PROM, FOR_PROM, INST, and NON_INST) was first tested as an independent

variable and board size (B_SIZE) as a dependent variable (Model 1). Six variables (AGE,

SIZE, IND, LEV, GROWTH and RISK) were then entered as control variables (MODEL

2).

Table 4.10 shows that none of the ownership variables influenced the board size

(B_SIZE) for both Model 1 and 2 in 2004, 2005 and 2006. The results also show that

none of the control variables has any effect on board size. The cross-sectional results thus

Table 4.10: Ownership Structure and Board Size: Cross-sectional Regression of (N=117)

Model 1 Model 2

Independent Variables Dependent Variable: Board Size 2004

IND_PROM -.437 (-1.727) (3.361)

-.247 (-.953)

FOR_PROM -.414 (-1.735)

-.265 (-1.060)

INST .039 (.216)

.041 (.226)

NON_INST .018 (.109)

.107 (.642)

.046 (.484)

Control Variable

AGE .235 (2.370)

SIZE .022 (.227)

IND .032 (.295)

LEVERAGE -.089 (-.964)

GROWTH -.053 (-.551)

RISK

Overall Model F 6.202*** 3.471*** Adjusted R Square .152 .176

Standard Error 2.122 2.092 Contd..

Ownership Structure, Corporate Governance and Performance

116

Model 1 Model 2 Independent Variables Dependent Variable: Board Size

2005 IND_PROM .001

(.005) .250

(.917) FOR_PROM -.058

(-.229) .131

(.509) INST .366

(1.941) .425

(2.257) NON_INST .215

(1.190) .361

(1.981)

Control Variable AGE .001

(.011) SIZE .299

(3.146) IND .057

(.604) LEVERAGE -.023

(-.207) GROWTH -.030

(-.329) RISK -.069

(-.724)

Overall Model F 6.522*** 3.964*** Adjusted R Square .160 .204

Standard Error 2.336 2.275 2006

IND_PROM .067 (.214)

.167 (.547)

FOR_PROM .078 (.259)

.195 (.638)

INST .333 (1.538)

.367 (1.738)

NON_INST .273 (1.357)

.343 (1.752)

Control Variable

AGE -.125 (-1.321)

SIZE .290** (3.141)

IND .126 (1.327)

LEVERAGE .030 (.262)

GROWTH .004 (.040)

RISK -.070 (-.724)

Overall Model F 4.047** 3.220***

Adjusted R Square .095 .161 Standard Error 2.273 2.189

Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

indicate that results do not vary across years and shareholding does not have any impact

on the size of the board.

Ownership Structure, Corporate Governance and Performance

117

The relationship between ownership structure and board composition was then

tested using cross-sectional regressions. In this analysis, ownership structure (each for

IND_PROM, FOR_PROM, INST, and NON_INST) was first tested as an independent

variable and board composition (B_COMP) as a dependent variable (Model 1). Six

variables (AGE, SIZE, IND, LEV, GROWTH and RISK) were then entered as control

variables (MODEL 2).

Table 4.11 shows yet again that none of the ownership variables influenced the

board composition (B_COMP) for both Model 1 and 2 in 2004, 2005 and 2006. The

results also show that none of the control variables has any effect on board composition.

The cross-sectional results thus indicate that results do not vary across years and

Table 4.11: Ownership Structure and Board Composition: Cross-sectional Regression of (N=117)

Model 1 Model 2

Independent Variables Dependent Variable: Board Composition 2004

IND_PROM .044 (.181)

.068 (.263)

FOR_PROM -.449 (-1.942)

-.389 (-1.571)

INST -.042 (-.238)

-.045 (-.246)

NON_INST .034 (.212)

.061 (.371)

Control Variable

AGE -.049 (-.526)

SIZE .128 (1.306)

IND -.015 (-.156)

LEVERAGE -.025 (-.234)

GROWTH .126 (1.374)

RISK .036 (.374)

Overall Model F 8.444*** 3.698***

Adjusted R Square .204 .189 Standard Error .136 .138

Contd..

Ownership Structure, Corporate Governance and Performance

118

Model 1 Model 2 Independent Variables Dependent Variable: Board Composition

2005 IND_PROM .142

(.545) .115

(.425) FOR_PROM -.333

(-1.352) -.265

(-1.040) INST .172

(.937) .200

(1.069) NON_INST .032

(.178) .030

(.168)

Control Variable AGE -.123

(-1.335) SIZE .004

(.044) IND .014

(.145) LEVERAGE .130

(1.199) GROWTH .134

(1.497) RISK -.079

(-.833)

Overall Model F 8.259*** 4.193*** Adjusted R Square .200 .216

Standard Error .130 .128 2006

IND_PROM .117 (.398)

.094 (.315)

FOR_PROM -.374 (-1.320)

-.354 (-1.188)

INST .097 (.474)

.080 (.389)

NON_INST -.095 (-.501)

-.075 (-.392)

Control Variable

AGE -.073 (-.790)

SIZE .036 (.397)

IND -.152 (-1.642)

LEVERAGE .036 (.322)

GROWTH .089 (.976)

RISK -.107 (-1.134)

Overall Model F 8.103*** 3.896***

Adjusted R Square .197 .200 Standard Error .126 .126

Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Ownership Structure, Corporate Governance and Performance

119

shareholding does not have any impact on the proportion of independent directors to total

directors on the board.

The results of pooled OLS without any company, time dummy are reported in

Table 4.12. Indian (IND_PROM) and foreign promoters (FOR_PROM) have a significant

positive while institutional investors (INST) a significant negative effect on ownership

concentration (OWN_CONC). Further, controlling for the six variables, foreign

promoters (FOR_PROM) as well as institutional investors (INST) has a significant

positive and negative effect on ownership concentration (OWN_CONC) respectively.

The results also show that growth (GROWTH) has a significant positive effect.

Table 4.12: Ownership Structure and Concentration: Pooled Regression, 2003-06

Model 1 Model 2 Dependent Variable: Ownership Concentration Independent Variables IND_PROM .263*

(2.192) .231

(1.890) FOR_PROM .717***

(6.282) .734*** (6.190)

INST -.046 (-.547)

-.050 (-.581)

NON_INST -.163* (-2.046)

-.168* (-2.088)

Control Variables AGE -.028

(-.662) SIZE .024

(.556) IND -.031

(-.722) LEV .012

(.240) GROWTH .134*

(3.279) RISK .024

(.553) Overall Model F 88.187*** 37.258*** Adjusted R Square .499 .509 Standard Error .077 .076 Contd…

Ownership Structure, Corporate Governance and Performance

120

Model 1 Model 2 Dependent Variable: Board Size

IND_PROM -.151 (-.961)

.026 (.170)

FOR_PROM -.160 (-1.075)

-.007 (-.047)

INST .224* (2.023)

.254* (2.331)

NON_INST .154 (1.481)

.225* (2.493)

Control Variables

AGE -.024 (-.456)

SIZE .262*** (4.858)

IND .067 (1.245)

LEV .022 (.348)

GROWTH -.038 (-.739)

RISK -.064 (-1.182)

Overall Model F 16.024*** 10.036***

Adjusted R Square .147 .205 Standard Error 2.230 2.152

Dependent Variable: Board Composition IND_PROM .090

(.596) .062

(.401) FOR_PROM -.396**

(-2.754) -.366*

(-2.449) INST .055

(.520) .049

(.452) NON_INST -.005

(-.048) .002

(.025)

Control Variables AGE -.079

(-1.498) SIZE .040

(.758) IND -.050

(-.937) LEV .052

(.843) GROWTH .110*

(2.134) RISK -.058

(-1.065)

Overall Model F 23.693*** 10.841*** Adjusted R Square .206 .219

Standard Error .131 .130 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Ownership Structure, Corporate Governance and Performance

121

The table further shows that institutions (INST) have a significant positive effect

on board size (B_SIZE). Further, controlling for the six variables, institutional (INST) as

well as non-institutional investors (NON_INST) has a significant positive effect on board

size (B_SIZE). The results also show that size (SIZE) has a significant positive effect on

the number of members on the board.

Foreign promoters (FOR_PROM) have a significant negative effect on board

composition (B_COMP). Further, controlling for the six variables, foreign promoters

(FOR_PROM) again has a negative effect on board composition (B_COMP). The results

also show that growth (GROWTH) has a significant positive effect on the proportion of

independent directors on the board.

Robustness Tests

To check for robustness of results obtained for ownership concentration (OWN_CONC),

board size (B_SIZE) and board composition (B_COMP) some findings are reported in

Table 4.13. In Column 1-3, companies belonging to manufacturing sector were

considered for regression analysis. This analysis assumes importance since the sample

indicates that most of the companies belong to this industry.

The results hold good for all the three governance models as was for the pooled

regression analyses (Model 2). Omitting companies where foreign ownership was more

than 50 percent does not alter results (column 4) for ownership concentration. Yet again,

foreign promoters (FOR_PROM) have significant positive while institutional investors

(INST) a significant negative effect on ownership concentration (OWN_CONC). The

results remain unchanged for the control variable, growth (GROWTH) which has a

significant positive effect on ownership concentration (OWN_CONC).

Ownership Structure, Corporate Governance and Performance

122

Table 4.13: Ownership Structure and Concentration: Results of Fixed Effect Regression for Sub-samples

1 2 3 4 Independent Variables IND_PROM .214

(1.690) .060

(.363) -.007

(-.045) .219

(1.599) FOR_PROM .838***

(6.528) .025

(.152) -.417*

(-2.515) .200*

(2.293) INST .008

(.094) .259*

(2.340) .022

(.198) -.114

(-1.040) NON_INST -.150*

(-1.776) .218*

(1.986) -.069

(-.629) -.225*

(-2.221) Control Variables AGE -.034

(-.731) -.072

(-1.201) -.094

(-1.564) -.014

(-.251) SIZE .017

(.359) .337

(5.583) -.004

(-.059) -.039

(-.710) IND

-.038

(-.696) LEV .082

(1.376) -.009

(-.118) .058

(.757) -.066

(-1.150) GROWTH .139**

(3.185) -.031

(-.539) .123*

(2.180) .174*** (3.250)

RISK .030 (.590)

.018 (.278)

-.025 (-.390)

-.012 (-.222)

Overall Model F 37.798*** 9.751*** 10.093*** 12.216*** Adjusted R Square .533 .214 .20 .272 Standard Error .076 2.090 .131 .073 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Inference

Overall, the results of the cross-sectional and pooled regression analysis indicate that the

shareholding by foreign promoters and institutional investors have a significant impact on

ownership concentration. This result replicates the finding of Li et al. (2006) that higher

the institutional ownership, the higher the concentration. They also report for significant

positive effect of promoter ownership on ownership concentration. Institutional and non-

institutional investors have a significant influence on the number of members on the

board. The ownership by foreign promoters has a significant negative effect on the

proportion of number of directors on the board. The results also show that certain control

variables, like growth and size have significant positive effect on governance variables.

Thus, the results support hypotheses 3(a, b); 4(c, d) as well as 5(b).

Ownership Structure, Corporate Governance and Performance

123

4.1.4 Results of Ownership Concentration and Performance

The relationship between ownership concentration and corporate performance was tested

first using cross-sectional regressions as in Xu and Wang (1997). Table 4.14 reports the

results from cross-sectional regressions for the financial years ending 2004, 2005 and

2006. The results suggest that controlling for the six variables (AGE, SIZE, IND, LEV,

GROWTH and RISK); ownership concentration (OWN_CONC) has no significant

Table 4.14: Ownership Concentration and Performance: Cross-sectional Regression (N=117)

Dependent Variable

Independent Variables ROA TOBINS_Q 2004 OWN_CONC .120

(1.351) .0116

(1.554) Control Variables AGE -.042

(-.468) -.030

(-.399) SIZE .152

(1.710) .194*

(2.609) IND .146

(1.628) -.080

(-1.075) LEVERAGE -.214*

(-2.146) -.352*** (-4.223)

GROWTH -.007 (-.082)

.226** (3.063)

RISK -.326*** (-3.553)

-.382*** (-4.983)

Overall Model F 5.694*** 14.811*** Adjusted R Square .221 .455 Standard Error .085 1.014 2005 OWN_CONC .061

(.695) .053

(.673) Control Variables AGE -.005

(-.053) -.044

(-.547) SIZE .258**

(2.894) .120

(1.492) IND .059

(.668) -.209** (-2.644)

LEVERAGE -.384*** (-3.946)

-.358*** (-4.079)

GROWTH -.079 (-.886)

.124 (1.546)

RISK -.204* (-2.266)

-.368*** (-4.539)

Overall Model F 5.753*** 10.707*** Adjusted R Square .223 .369 Standard Error .103 1.385 Contd…

Ownership Structure, Corporate Governance and Performance

124

Dependent Variable Independent Variables ROA TOBINS_Q

2006 OWN_CONC -.005

(-.059) .031

(.383) Control Variables AGE .016

(.190) -.042

(-.520) SIZE .225**

(2.749) .129

(1.619) IND .072

(.870) -.115

(-1.431) LEVERAGE -.437***

(-4.709) -.410*** (-4.539)

GROWTH -.068 (-.797)

.047 (.570)

RISK -.256** (-2.986)

-.335*** (-4.009)

Overall Model F 8.473*** 9.748*** Adjusted R Square .311 .345 Standard Error .090 2.156 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

impact on return on assets (ROA) and tobin’s q (TOBIN_Q). The results show that risk

(RISK) and leverage (LEV) have a significant negative effect on performance for all the

years. The cross-sectional results thus show that there is no significant impact of

ownership concentration on performance. The results support the popular thinking that

dispersed shareholding may be the best way to improve economic efficiency of the

corporate sector.

The results of pooled OLS without any company, time dummy are reported in

Table 4.15. Ownership concentration (OWN_CONC) did not have any significant effect

on return on assets (ROA) and tobin’s q (TOBINS_Q) when six control variables were

entered. Leverage (LEV) and risk (RISK) variables have a significant negative effect

while size (SIZE) a positive effect on performance.

Ownership Structure, Corporate Governance and Performance

125

Table 4.15: Ownership Concentration and Performance: Pooled Regression, 2003-06

Dependent Variable

Independent Variables ROA TOBINS_Q OWN_CONC .051

(1.024) .054

(1.166) Control Variables AGE -.010

(-.194) -.034

(-.721) SIZE .214***

(4.346) .172*** (3.694)

IND .094 (1.899)

-.126** (-2.714)

LEVERAGE -.355*** (-6.474)

-.372*** (-7.205)

GROWTH -.064 (-1.296)

.108* (2.139)

RISK -.255*** (-5.026)

-.326*** (-6.801)

Overall Model F 19.231*** 27.738*** Adjusted R Square .267 .348 Standard Error .092 1.674 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Robustness Tests

To check the robustness of results obtained, certain restrictions were placed on the

sample properties in terms of the herfindal index and reported results are presented in

Table 4.16. As discussed before herfindal index28, which reflects the full ownership

structure of the firm, has been used as a proxy of ownership concentration. The index has

a maximum of unity and approaches a minimum of zero as the ownership structure gets

increasingly diffuse. Omitting companies where the index was more than 0.20 altered

28 Herfindal index of ownership concentration has been taken as the sum of squared percentage of shares controlled by each top three shareholders (H3).

Ownership Structure, Corporate Governance and Performance

126

results for performance measured as return on assets (ROA). The results suggest that

controlling for the six variables, ownership concentration (OWN_CONC) has a

significant negative effect on return on assets (ROA). The lower the ownership by top

three shareholders, the higher was the performance. The results refute Shleifer and

Vishny hypothesis (1986) that large shareholders may help reduce the free-rider problem

of small investors, and hence are value-increasing. The results further confirm that

leverage (LEV) and risk (RISK) have a significant negative while size (SIZE) a

significant positive effect on performance.

Table 4.16: Ownership Concentration and Performance: Results of Fixed Effect Regression for Sub-sample

Dependent Variable

Independent Variables ROA TOBINS_Q OWN_CONC -.125*

(-2.236) -.091

(-1.686) Control Variables AGE .000

(.001) .048

(.900) SIZE .329***

(5.929) .139** (2.602)

IND -.073 (-1.297)

-.240*** (-4.384)

LEVERAGE -.338*** (-5.757)

-.326*** (-5.752)

GROWTH -.026 (-.476)

.180*** (3.396)

RISK -.213*** (-3.804)

-.268*** (-4.961)

Overall Model F 15.851*** 19.789*** Adjusted R Square .279 .329 Standard Error .068 1.443 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Ownership Structure, Corporate Governance and Performance

127

Inference

Overall, the results of the cross-sectional and pooled regression analysis indicate that the

ownership concentration does not have a significant impact on performance defined as

return on assets as well as tobin’s q. The results on return on assets are consistent with the

findings of Xu and Wang (1997). However, they are contrary to the findings on impact of

concentration ratios on market-to-book value. The results only show that only control

variables, namely size, leverage and risk effect performance. Thus, the results reject

hypotheses 6 and 7. Restricting the sample by excluding companies with the herfindal

index more than 0.20 changed the results highlighting lower the ownership by top three

shareholders, the higher was the performance.

4.1.5 Results of Ownership Structure, Corporate Governance and Performance

Regression analysis is used to investigate the relationship between measures of corporate

governance (OWN_CONC, B_SIZE, and B_COMP), ownership structure (IND_PROM,

F_PROM, INST, and NON_INST) and performance (ROA and TOBINS_Q). Six

variables (AGE, SIZE, IND, LEV, GROWTH and RISK) were entered as control

variables.

The results for the cross-sectional regressions for financial years ending 2004,

2005 and 2006 are presented in Table 4.17. Foreign ownership (F_PROM) has a

significant and positive impact on corporate performance (ROA) for financial ended

2005. None of the other ownership and governance variables have any significant effect

on performance for any of the periods under study. The results further show that that

leverage (LEV) and risk (RISK) have a significant negative effect on performance (both

ROA and TOBINS_Q) for all the said period. The cross-sectional results indicate that in

Ownership Structure, Corporate Governance and Performance

128

Table 4.17: Ownership Structure, Corporate Governance and Performance: Cross-sectional Regression (N=117)

Dependent Variable

Independent Variables ROA TOBINS_Q 2004 IND_PROM .160

(.574) -.110

(-.413) FOR_PROM .175

(.595) -.242

(-.866) INST .220

(1.126) -.033

(-.179) NON_INST -.048

(-.267) -.308

(-1.792) OWN_CONC -.044

(-.390) .004

(.038) B_SIZE .008

(.087) .001

(.007) B_COMP -.026

(-.272) -.063

(-.693) Control Variables AGE -.015

(-.174) -.050

(-.606) SIZE .199*

(2.237) .106

(1.246) IND .093

(1.072) -.087

(-1.044) LEVERAGE -.429***

(-4.104) -.457*** (-4.585)

GROWTH -.070 (-.806)

.036 (.435)

RISK -.219* (-2.464)

-.310*** (-3.652)

Overall Model F 4.996*** 6.318*** Adjusted R Square .309 .373 Standard Error .090 2.109 2005 IND_PROM .503

(1.867) .304

(1.261) FOR_PROM .558*

(2.098) .124

(.521) INST .334

(1.739) .194

(1.135) NON_INST .197

(1.073) -.021

(-.128) OWN_CONC -.027

(-.231) .040

(.378) B_SIZE .093

(.936) .041

(.470) B_COMP -.045

(-.451) -.052

(-.585) Control Variables AGE -.022

(-.238) -.041

(-.502) SIZE .241*

(2.466) .104

(1.194) IND .077

(.826) -.152

(-1.843) LEVERAGE -.327**

(-3.029) -.384*** (-3.982)

GROWTH -.059 (-.641)

.110 (1.333)

RISK -.189* (-1.998)

-.360*** (-4.276)

Overall Model F 3.690*** 6.654*** Adjusted R Square .232 .388 Standard Error .103 1.364 Contd…

Ownership Structure, Corporate Governance and Performance

129

Dependent Variable Independent Variables ROA TOBINS_Q

2006 IND_PROM .160

(.574) -.110

(-.413) FOR_PROM .175

(.595) -.242

(-.866) INST .220

(1.126) -.033

(-.179) NON_INST -.048

(-.267) -.308

(-1.792) OWN_CONC -.044

(-.390) .004

(.038) B_SIZE .008

(.089) .001

(.007) B_COMP -.026

(-.272) -.063

(-.693) Control Variables AGE -.015

(-.174) -.050

(-.606) SIZE .199*

(2.237) .106

(1.246) IND .093

(1.072) -.087

(-1.044) LEVERAGE -.429***

(-4.104) -.457*** (-4.585)

GROWTH -.070 (-.806)

.036 (.435)

RISK -.219* (-2.464)

-.050*** (-3.652)

Overall Model F 4.996*** 6.318*** Adjusted R Square .309 .373 Standard Error .090 2.109 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

general that there is no significant relationship between measures of corporate

governance, ownership structure and performance.

The pooled regression results are reported in Table 4.18. Indian (IND_PROM),

foreign promoters (FOR_PROM), and institutional investors (INST) have a significant

positive effect on return on assets (ROA). However, none of the ownership variables

have any effect on tobin’s q. Further, none of the governance variables have any

significant effect on performance (both ROA and TOBINS_Q). The results also show

that control variables have significant effect on performance. Leverage (LEV) and risk

(RISK) have a significant negative while size (SIZE) a significant positive effect on

performance.

Ownership Structure, Corporate Governance and Performance

130

Table 4.18: Ownership Structure, Corporate Governance and Performance: Pooled Regression, 2003-06

Dependent Variable

Independent Variables ROA TOBINS_Q IND_PROM .433**

(2.940) .203

(1.489) FOR_PROM .497***

(3.284) .070

(.498) INST .265*

(2.559) .122

(1.265) NON_INST .122

(1.252) -.117

(-1.296) OWN_CONC -.069

(-1.048) -.011

(-.182) B_SIZE .035

(.651) -.018

(-.370) B_COMP -.055

(-1.027) -.069

(-1.387) Control Variables AGE -.022

(-.432) -.031

(-.654) SIZE .216***

(4.079) .165*** (3.351)

IND .093 (1.837)

-.088 (-1.873)

LEVERAGE -.295*** (-5.014)

-.384*** (-7.022)

GROWTH -.048 (-.957)

.098* (2.112)

RISK -.238*** (-4.619)

-.313*** (-6.537)

Overall Model F 12.201*** 18.310*** Adjusted R Square .294 .391 Standard Error .090 1.618 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

To check whether collinearity between governance measures has anything to do

with the obtained results, use of each measure was made separately as shown in Table

4.19. The results remain unchanged as no significant relationship has been found between

measures of corporate governance (OWN_CONC, B_SIZE, and B_COMP) and

performance (ROA and TOBINS_Q).

Ownership Structure, Corporate Governance and Performance

131

Table 4.19: Ownership Structure, Corporate Governance and Performance: Regression Results with Single Governance Measure at a Time

Dependent Variable

Independent Variables

ROA TOBINS_Q

IND_PROM .432** (2.936)

.413** (2.822)

.418** (2.859)

.198 (1.450)

.196 (1.444)

.200 (1.477)

FOR_PROM .521*** (3.473)

.466*** (3.277)

.443** (3.086)

.093 (.667)

.087 (.659)

.064 (.479)

INST .271** (2.640)

.261* (2.519)

.278** (2.707)

.114 (1.195)

.115 (1.192)

.118 (1.235)

NON_INST .130 (1.341)

.128 (1.321)

.143 (1.482)

-.122 (-.131)

-.120 (-1.334)

-.120 (-1.350)

OWN_CONC -.075 (-1.158)

-.008 (-1.354)

B_SIZE .056 (1.086)

-.001 (-.014)

B_COMP -.063 (-1.225)

-.064 (-1.341)

Control Variables AGE -.018

(-.368) -.015

(-.299) -.021

(-.425) -.025

(-.529) -.024

(-.525) -.030

(-.633) SIZE .223***

(4.388) .207*** (3.934)

.224*** (4.403)

.157*** (3.329)

.157*** (3.220)

.159*** (3.338)

IND .098 (1.937)

.097 (1.096)

.097 (1.920)

-.086 (-1.830)

-.086 (-1.821)

-.089 (-1.897)

LEVERAGE -.297*** (-5.057)

-.299*** (-5.090)

-.295*** (-5.012)

-.388*** (-7.107)

-.388*** (-7.108)

-.385*** (-7.059)

GROWTH -.054 (-1.074)

-.062 (-1.272)

-.058 (-1.168)

.091* (1.968)

.090* (1.974)

.097* (2.122)

RISK -.237*** (-4.620)

-.236*** (-4.577)

-.243*** (-4.721)

-.308*** (-6.462)

-.309*** (-6.456)

-.312*** (-6.552)

Overall Model F 14.249*** 14.227*** 14.270*** 21.469*** 21.467*** 21.744*** Adjusted R Square .294 .294 .294 .391 .391 .395 Standard Error .090 .090 .090 1.619 1.618 1.614 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

There was a further need to see the effect on performance of differences between

different board sizes and the number of independent directors as a percentage or

proportion of total directors. Table 4.20 shows that board size (B_SIZE) with 4-9

members has negative but insignificant coefficients when return on assets (ROA) and

Ownership Structure, Corporate Governance and Performance

132

tobin’s q were the dependent variable. The same were however positive but again

insignificant for board size was more than 9 members. The results for effect of control

variables on performance were similar to earlier outcome. It can also be observed that

under large boards (size more than 9 members) there is a significant negative effect of

board composition on performance (both ROA and TOBINS_Q).

Table 4.20: Ownership Structure, Corporate Governance and Performance: Regression Results with Board Size Categorization

Dependent Variable: ROA Dependent Variable: TOBINS_Q Independent

Variables Board size of 4-9 members

Board size of more than 9

members

Board size of 4-9 members

Board size of more than 9

members IND_PROM .558

(1.542) .357*

(2.037) -.110

(-.519) .384*

(2.504) FOR_PROM .5190

(1.460) .636** (2.987)

-.245 (-1.142)

.295 (1.586)

INST .303 (.1.443)

.383* (2.526)

-.109 (-.818)

.380** (2.867)

NON_INST .191 (1.066)

.118 (.807)

-.290* (-2.415)

.031 (.244)

OWN_CONC .056 (.560)

-.132 (-1.039)

-.008 (-.102)

-.091 (-.816)

B_SIZE -.052 (-.601)

.051 (.638)

-.059 (-1.013)

.023 (.332)

B_COMP .070 (.705)

-.219* (-2.517)

-.033 (-.500)

-.161* (-2.113)

Control Variables AGE .006

(.048) -.137

(-1.772) -.004

(-.057) -.107

(-1.580) SIZE .152

(1.661) .297*** (3.547)

.169** (2.678)

.166* (2.268)

IND .219* (2.134)

-.149 (-1.768)

-.045 (-.667)

-.207** (-2.811)

LEVERAGE -.343** (-3.130)

-.182 (-1.963)

-.382*** (-5.088)

-.404*** (-4.983)

GROWTH -.114 (-1.223)

.036 (.462)

.013 (.204)

.234*** (3.473)

RISK -.327** (-2.805)

-.031 (-.367)

-.357*** (-5.294)

-.211** (-2.809)

Overall Model F 5.445*** 6.502*** 10.436*** 10.862*** Adjusted R Square .353 .403 .372 .474 Standard Error .095 1.986 1.736 1.370 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Ownership Structure, Corporate Governance and Performance

133

To analyze whether the presence of independent directors on the board has any

influence on the performance of the company, regressions with different performance

variables as dependent variables and proportion of independent directors as independent

variables were estimated. Table 4.21 highlights that there was a significant negative

Table 4.21: Ownership Structure, Corporate Governance and Performance: Regression Results with Board Composition Categorization

Dependent Variable: ROA Dependent Variable: TOBINS_Q Independent

Variables Proportion of independent

directors to total board size was up

to 50%

Proportion of independent

directors to total board size was

greater than 50%

Proportion of independent

directors to total board size was up

to 50%

Proportion of independent

directors to total board size was

greater than 50% IND_PROM .278

(1.249) .653*** (3.314)

.092 (.431)

.361* (2.125)

FOR_PROM .356 (1.326)

.321** (2.731)

-.055 (-.214)

.139 (1.375)

INST .170 (1.137)

.433** (2.786)

.057 (.399)

.258 (1.925)

NON_INST .010 (.074)

.202 (1.355)

-.168 (-1.265)

-.086 (-.666)

OWN_CONC -.079 (-.711)

-.131 (-1.575)

.003 (.030)

-.069 (-.964)

B_SIZE -.025 (-.293)

.069 (.905)

-.073 (-.897)

.029 (.432)

B_COMP -.184* (-2.165)

.053 (.750)

.058 (.710)

.137* (2.265)

Control Variables AGE -.085

(-1.068) .064

(.877) -.168*

(-2.213) .119

(1.910) SIZE .171*

(1.998) .334*** (4.618)

.235** (2.863)

.162* (2.596)

IND .172* (.2117)

-.019 (-.259)

-.025 (-.326)

-.193** (-3.044)

LEVERAGE -.279** (-3.059)

-.239*** (-3.346)

-.412*** (-4.714)

-.248*** (-4.030)

GROWTH .010 (.152)

-.010 (-.129)

.065 (1.002)

.266*** (3.908)

RISK -.303*** (-3.345)

-.208** (-2.788)

-.283*** (-3.254)

-.303*** (-4.708)

Overall Model F 6.414*** 5.523*** 8.209*** 11.900*** Adjusted R Square .295 .245 .352 .439 Standard Error .107 .070 1.906 1.223 Note: Heteroskedasticity-consistent t statistics are in the parentheses. *** Correlation is significant at the 0.001 level (2-tailed). ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

Ownership Structure, Corporate Governance and Performance

134

effect on return on assets when the proportion of independent directors to total board size

was up to 50 percent. However, the coefficients for board composition were significant

and positive with tobin’s q when the independent directors were more than 50 percent.

The coefficients of board independence with return on assets (ROA) were insignificant

when the directors were more than 50 percent. Similar results were reported with tobin’s

q (TOBIN_Q) when the number of independent directors were less than 50 percent of the

total number of directors.

Robustness Tests

To check the robustness of results that different categories of board size impact

performance differently, one-way ANOVA was used to test for the comparison of means

across different categories. The results of descriptive statistics with mean values of

performance variables across different board size categories and the results of one-way

ANOVA test for the comparison of means are shown in Table 4.22. A look at the results

with ROA revealed that the mean was 0.158 when the board size was between 4 and 9;

the mean value dropped to 0.154 when the board size exceeded 9. This difference in

Table 4.22: Descriptives and Results of One Way ANOVA for Comparison of Means for Board Size Categories

Board Size

Category N Mean of

Performance Variable

Sum of Squares df

Mean Square F Sig.

ROA 4-9 members 149 .158

Between Groups

.001 1 .001 .128 .721

> 9 members 202 .154

Within Groups

4.011 349 .011

Total 351 .156 4.012 350 TOBINS_Q 4-9 members

149 3.065 Between Groups

27.055 1 27.055 6.387 .012

> 9 members 202 2.484

Within Groups

1478.404 349 4.236

Total 351 2.722 1505.459 350

Ownership Structure, Corporate Governance and Performance

135

means across categories was however not significant. One-way ANOVA repeated with

TOBINS_Q revealed that the mean was 3.046 when the board size was between 4 and 9;

the mean value decreased to 2.484 when the board size exceeded 9. This difference in

means across categories herein was significant. The results thus show the inverse

relationship between board size and corporate performance.

The results of descriptive statistics with mean values of performance variables

across different board composition categories and the results of one-way ANOVA test for

the comparison of means are shown in Table 4.23. A look at the results with ROA

revealed that the mean was 0.176 when the proportion of independent directors to total

board size was up to 50 percent; the mean value dropped to 0.137 when the independent

directors exceeded 50 percent. This difference in means across categories was significant.

One-way ANOVA repeated with TOBINS_Q revealed that the mean was 3.244 the

proportion of independent directors to total board size was up to 50 percent; the mean

value dropped to 2.238 when the independent directors exceeded 50 percent. This

difference in means across categories was significant. The impact of board independence

on performance is more when the board independence is up to 50 percent.

Table 4.23: Descriptives and Results of One Way ANOVA for Comparison of Means for Board Independence Categories

Board

Independence Category

N Mean of Performance

Variable Sum of Squares df

Mean Square F Sig.

ROA Up to 50% 169 .176 Between Groups

.135 1 .135 12.148 .001

> 50% 182 .137 Within Groups

3.877 349 .011

Total 351 .156 4.012 350 TOBINS_Q Up to 50% 169 3.244 Between

Groups 88.641 1 88.641 21.835 .000

> 50% 182 2.238 Within Groups

1416.819 349 4.060

Total 351 2.722 1505.459 350

Ownership Structure, Corporate Governance and Performance

136

Inference The results for the influence of board independence on corporate performance were

mixed. No consistent significant results with a particular dependent variable across all

specifications were obtained. The mixed results are unlike with the ones obtained by

studies which report no (Klien, 1998; Bhagat and Black, 1997; Hermalin and Weisbach,

1991; and Lawrence and Stapledon, 1999) or positive (Baysinger and Butler, 1985; and

Hambrick and Jackson, 2000) effect of independent directors on the performance of the

firm. However, the results support a similar study done by Garg (2007) on BSE-200

Index companies. The results though show that control variables, namely size, leverage

and risk effect performance. Thus, the results therefore partially support hypotheses 9-13.

The results for the impact of different categories of board size on performance

were consistent with the theory that when the board becomes large, agency problems

increase and the board become more symbolic and less a part of the management process

(Lipton and Lorsch, 1992; and Jensen, 1993). Smaller boards also reduce the possibility

of free riding by, and increase the accountability of individual directors (Abor and

Biekpe, 2007)

The results show that corporate performance decreases when the independent

directors exceed 50 percent of the total board size. The inverse relationship needs to be

interpreted with caution. Companies usually tend to increase board independence under

adverse circumstances due to pressure wielded by various stakeholders. Similarly, the

problematic independent directors are weeded out at the times of good performance when

no one protests. This result is supported in literature by Hermalin and Weisbach (1988).

However, the same have been contradicted by Agrawal and Knoeber (1996).

Ownership Structure, Corporate Governance and Performance

137

4.2 Discussion and Conclusion Using a data set of publicly listed companies of BSE 200 Index, this study has found

some interesting relations between ownership structure (shareholding pattern) and other

dimensions of corporate governance, such as ownership concentration, board size and

board composition. The empirical evidences put forth by the study may help assess or

predict the impact of the findings on future corporate governance and performance. An

interesting issue, for example, is whether an increase in institutional ownership, viz.,

mutual funds, UTI, banks, financial institutions, insurance companies and foreign

institutional investors etc. improves the performance. The current research found

significant positive effect of institutional ownership on company profitability. Although

some research has suggested that it may not improve long-term performance, because

institutional investors may not always represent the best interests of all shareholders

(Sundaramurthy and Rechner, 1997), our current research shows that even short-term

performance may benefit from an increase in institutional ownership on corporate

profitability. As discussed in Chapter 3, the shareholding patterns in India reveal a

marked level of concentration in the hands of the Indian promoter and promoter group,

which are primarily family owned. There is evidence for the fact that higher Indian

promoters’ ownership leads to higher corporate performance. The results also support

existing Indian studies that foreign ownership does have a significant positive influence

on the corporate performance (Chibber and Majumdar, 1998, 1999; Sarkar and Sarkar,

1999, 2000; Patibandla, 2002; Douma et al., 2002; Ramaswamy et al., 2002; and

Pattanayak, 2008), while are in contrast with results of Kumar (2004) regarding no role of

foreign investors on value of the company. The results are further confirmatory to

Ownership Structure, Corporate Governance and Performance

138

findings regarding insignificant effect of non-institutional investors on performance

(Kumar, 2004; and Mittal and Kansal, 2007). These non-institutional investors comprise

individual investors, bodies corporate and others who constitute minority class of

shareholders. As expected these non-controlling minority shareholders cannot be

expected to wield any influence on the performance of the company. This also brings

forth the fact that there exists considerable opportunity to siphon off funds from the

organization at their expense and that of the company (Johnson et al., 2000).

The results also highlight the fact that ownership concentration has no significant

influence on company performance. Some authors have argued that if stock ownership is

concentrated, then it is much easier for shareholders to coordinate their actions and

demand information from managers to assess their performance (Mallette and Fowler,

1992). In other words, ownership concentration may help shareholders to more

effectively monitor managerial performance. Increasing the proportion of independent

directors on the board can improve monitoring, but no significant effect were found for

this factor, and thus have no conclusive evidence to support the effect of monitoring on

company performance. As there are evidences to suggest that company’s resources alone

may not always predict company performance. Firm performance is also affected by the

internal resources of a company and its external environment (Pfeffer and Salancik,

1978).

Consistent with some recent studies that have been conducted in the West, the

present study found no significant effects of board size and board composition on

company performance. Even in an East Asian business context, these two governance

measures seem to be inconclusive in terms of their effect on company performance. As

Ownership Structure, Corporate Governance and Performance

139

some authors have suggested, the effects of these two factors on firm performance can be

both positive and negative (Li et al., 2006), which can be the reason for no significant

effect on company performance.

Some of the control variables had a significant effect on the corporate

performance. Contrary to Mittal and Kansal (2007), the impact of leverage on

performance was negative. The results also confirm the conclusions by Demsetz and

Lehn (1985) and Chen (2001) that changes of business circumstances are not beneficial

for corporate performance. Company specific uncertainties appear to be negatively

valued by the market.

Conclusion and Recommendations

140

Chapter 5

CONCLUSION AND RECOMMENDATIONS

orporate governance is the set of processes, customs, policies, laws and

institutions affecting the way a company is directed, administered or controlled.

Corporate governance also includes the relationships among the many stakeholders

involved and the goals for which the corporation is governed. The principal stakeholders

are the shareholders, management and the board of directors. Other stakeholders include

employees, suppliers, customers, banks and other lenders, regulators, the environment

and the community at large. Report of SEBI Committee on Corporate Governance

defines corporate governance as the acceptance by management of the inalienable rights

of shareholders as the true owners of the corporation and of their own role as trustees on

behalf of the shareholders. It is about commitment to values, about ethical business

conduct and about making a distinction between personal and corporate funds in the

management of a company. The definition is drawn from the Gandhian principle of

trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance

is viewed as ethics and a moral duty.

The corporate governance systems have often evolved in response to corporate

failures. The first well-documented failure of governance was that of the South Sea

Bubble in the 1700s which brought about a revolution in the business laws and practices

in the United Kingdom. Likewise after the 1929 stock market crash the securities laws of

the United States were amended to avoid such a disaster. The recent Enron debacle led to

the passing of the Sarbanes Oxley Act. The history of corporate governance has been

C

Conclusion and Recommendations

141

witness to a number of such corporate scandals. Whenever there is a corporate

breakdown it exposes the weaknesses of the existing system, which calls for change. The

opening up of the Indian economy or the economic liberalization of India came about in

the year 1991. Immediately after this shift in the economic policy, certain scams or

commercials scandals were noticed. The first was a major security scam; the second one

came about when the multinational companies started consolidating their shareholdings.

The next one involved the vanishing companies of the 1993-94 and the fourth one was a

large scale fraudulent and unfair trade practices by the capital market participants and the

companies. These financial debacles made the government, regulatory authorities,

corporate sectors, and the financial institutions, realize the need of having a powerful

corporate governance mechanism in India.

While there seem to be a movement towards a convergence in corporate

governance norms, differences persist. These differences have strong linkage with the

nature of the legal systems and the markets themselves. Extant research evidences two

systems of corporate governance. First, the outsider systems typical in the U.S. and U.K.

which are generally characterized by an active and liquid stock market, separation of

ownership and control, institutional investment looking at the return in the short and

medium term, and stringent disclosure norms aimed at ensuring that investors can make

their own informed decisions. Insider systems typical in continental Europe and some

Asian countries which are commonly characterized by concentrated ownership or voting

power and a multiplicity of inter-firm relationships and corporate holdings, greater

emphasis on stakeholder issues, and institutional investment based on strong links with

the company. Although the Indian legal system is obviously built on the English

Conclusion and Recommendations

142

common law system, the corporate governance system in by and large a hybrid of the

outsider systems and the insider systems. The Indian corporate sector is a mix of

government and private companies (business group families, multinationals and

individual companies), however, it has not suffered from the cronyism that has dominated

some of the developing economies, nor does it possess the characteristics of the Korean

chaebols.

The regulatory framework of corporate governance consists of the Companies

Act, the Securities and Exchange Board of India (SEBI) Act, 1992, the Securities

Contracts (Regulation) Act, 1956, Sick Industrial Companies (Special Provisions) Act,

1985 and the Listing Agreement. India has had a well established regulatory framework

for more than four decades, which forms the foundation of the corporate governance

system in India. SEBI, vide its circular dated February 21, 2000, specified principles of

corporate governance and introduced a new clause 49 in the listing agreement of the

stock exchanges. The revised clause 49 as it stands today is applicable to all the listed

companies in India. The SEBI, in designing corporate governance norms, has made

considerable effort to take the best practices in leading equity markets. Additionally,

numerous initiatives have been taken by SEBI to enhance corporate governance practices,

viz., streamlining of the disclosure, investor protection guidelines, book building, entry

norms, listing agreement, preferential allotment disclosures and lot more.

Literature on corporate governance identifies the importance of the structure of

ownership and control in setting the background for the corporate governance issues that

can arise in reality. Three aspects that need to be considered are the structure of

ownership and its concentration; the instruments of control and exercise of control. The

Conclusion and Recommendations

143

connection between ownership structure and performance has been the subject of an

important and ongoing debate in the corporate finance literature. The empirical studies

about the relation between both variables seem to have yielded conflicting results.

Further, it has been observed that the general features of the legal and regulatory system,

and that the historical factors and experiences have contributed to the current corporate

governance system and are still playing an important role. As India has a unique

environment, it is argued that changes on corporate governance in India should take place

within the context of India’s social and business institutions. Most of the studies which

were undertaken in the context of India are at aggregate industry level and structured in

the traditional neo-classical framework where institutional mechanisms have received

scanty attention. Even in many cross-country studies and reviews, India has not featured.

In the later phase of nineties, some of the scholars have tried to fill this void by entirely

focusing on India. Nevertheless, empirical studies on Indian ownership are few. The

extent of separation between ownership and control is not clear, and the nature and extent

of use of group structures is not known. The present study fills these research gaps.

5.1 Key Empirical Findings

The study critically evaluated the legal and regulatory framework concerning corporate

governance, examined the structure of corporate ownership and its concentration, as well

as empirically analyzed effects of ownership structure on corporate governance and

performance. The study has been limited to all the companies that comprise the BSE 200

Index for six financial years from FY 2000-2001 to FY 2005-2006. The key findings of

the study were as follows:

Conclusion and Recommendations

144

5.1.1 The Legal and Regulatory Framework Concerning Corporate Governance in India A review of the legal and regulatory framework concerning corporate governance in

India revealed that:

• The corporate governance system in by and large a hybrid of the outsider and the

insider systems.

• The government regulations of business entry, exit and operations remain

complex.

• The Indian legal system provides one of the highest levels of investor protection

in the region with a high disclosure and investor protection index.

• In terms of investor protection creditor rights, the Indian legal system provides

excellent protection for lenders.

• The quality of public enforcement of securities laws in India appears problematic.

It appears that de facto protection of investor’s rights in India lags far behind the

de jure protection.

• The three committees chaired by Kumar Mangalam Birla, Naresh Chandra and

Narayana Murthy have been instrumental in bringing about far reaching changes

in corporate governance in India through the formulation of Clause 49 of Listing

Agreements.

• The micro and small enterprises (MSEs) operate in a system governed almost

completely with informal mechanisms based on trust, reciprocity and reputation,

with little recourse to the legal system.

• The corporate governance in co-operative banks and non-bank financial

companies (NBFC) has received inadequate attention from regulators. Rural co-

Conclusion and Recommendations

145

operative banks are frequently run by politically powerful families as their

personal fiefdoms, with little professional involvement and considerable

channeling of credit to family businesses.

• Convergence towards one set of standards i.e., the International Financial

Reporting Standards (IFRS) in the accounting area will not only make it easier for

companies to conduct business and raise capital from anywhere in the world but

would also result in enhanced disclosure and transparency for the investors.

• India’s corporate governance reforms have mainly focused on internal

mechanisms and compare favourably with the rest of the world.

5.1.2 The Structure of Corporate Ownership and its Concentration

Empirical evidence presented in this study underlines the importance of ownership

structure both in terms of distribution and the types of large shareholders for corporate

governance. The structure of corporate ownership and its concentration was examined for

134 companies of BSE 200 Index for the FY 2000-2001 to FY 2005-2006. The major

findings were:

• Companies in India, unlike several other emerging markets, typically maintain

their shareholding pattern over time. This is especially true for the overall

proportion of shares held by promoters and non-promoters.

• On an average the Indian promoters together with persons acting in concert held

around 34 percent of the total outstanding shares from 2001 to 2006. Furthermore,

Indian promoters have the highest stake in 54 percent of all cases, and were also

more often than any other owner type the second, third, fourth and the fifth

Conclusion and Recommendations

146

largest. The foreign promoters held around 12 percent shareholding for the said

period.

• In the case of non-promoters holding their has been an increase in the share of the

institutions from 21 percent as on 31 March 2001 to 28 percent on 31 March 2006

while a decrease for the non-institutions from 34 percent to 27 percent over the

same time.

• The proportion of outstanding shares held by the banks, financial institutions,

insurance companies, corporate bodies and individuals have decreased in the

same period.

• Institutional investors especially foreign institutional investors are consolidating

their holdings is quite apparent from the study. During the six-year period, the

share of foreign institutional investors has phenomenally increased by 164

percent.

• The share of ‘others’ i.e., shares in transit (NSDL and CDSL), GDR’s, non-

domestic company, international finance corporate, foreign companies, non-

promoter director, trust, foreign national, foreign bank etc. has increased from 3

percent in 2001 to 5 percent in 2006.

• There is a difference in the shareholding pattern of companies in different

industries in terms of the proportion of shares held by promoters re non-

promoters. While the share of promoters holding was 47 percent for

manufacturing companies, it was only 41 percent in the case of service

companies. The results further show that foreign investment in service vis-à-vis

manufacturing sector was low.

Conclusion and Recommendations

147

• There was only a marginal increase in 2006 vis-à-vis 2001 in the number of

companies wherein promoters held more than 35 percent stake. The institutions

considerably consolidated their holdings in Indian companies in 2006 with stakes

going up above 35 percent for 36 companies from just 16 companies in 2001.

However, there was a considerable fall in the significant shareholding of non-

institutions with only 27 companies in 2006 down from 56 companies in 2001.

• The largest owner in a company held 26 percent of the equity on an average. This

investor owned 2.6 times more than the second largest (10.01%).

• The five largest owners for the sample companies have a 50 percent shareholding.

This concentration pattern prevails well more across the manufacturing (50.26)

than the service companies (46.75).

• The Indian promoters have the highest stake in 54 percent of all cases, and were

also more often than any other owner type the second (51%), third (43%), fourth

(39%) and the fifth (31%) largest owner for the period 2000-2006.

• The individuals were the least significant investor type in terms of large stakes.

The probability that a big investor is an individual is around 1 percent regardless

of size rank. The same also holds good to a very large extent for mutual funds,

banks, financial institutions and ‘others.’

• The shares held by the top three investors (T3) increased from 41 percent in 2001

to around 42 percent in 2006. The Herfindal index (H3) too increased from 0.105

in 2001 to 0.114 in 2006. The share of top five investors (T5) increased from 48

percent in 2000 to 49 percent in 2006 while the Herfindal index (H5) increased

Conclusion and Recommendations

148

from 0.097 to 0.103 over the said time. There has been a drop in the share of top

three and five shareholders during 2003-04 and 2004-05.

5.1.3 Effects of Ownership Structure on Corporate Governance and Performance

Using a data set of 117 publicly listed companies of BSE 200 Index for the FY 2003-

2004 to FY 2005-2006, this study analyzed how corporate ownership structure

(shareholding pattern) affects their corporate governance and performance by invoking

cross-sectional and pooled regression analyses. The major findings were:

• The shareholding by promoters (both Indian and foreign) have a significant

positive impact on corporate performance. The results of pooled regression

analysis also confirm a significant effect of institutional investors on performance.

• The shareholding by foreign promoters and institutional investors has a significant

impact on ownership concentration.

• Institutional and non-institutional investors have a significant influence on the

number of members on the board.

• The ownership concentration does not have a significant impact on performance

defined as return on assets as well as tobin’s q.

• Restricting the sample by excluding companies with the herfindal index more

than 0.20 highlights the fact that lower the ownership by top three shareholders,

the higher was the performance.

• The results for the influence of board independence on corporate performance

were mixed. No consistent significant results with a particular dependent variable

across all specifications were obtained.

Conclusion and Recommendations

149

• The results of one-way ANOVA test for the comparison of means for board size

categories reveals an inverse relationship between board size and corporate

performance.

• The results of one-way ANOVA test for the comparison of means for board

independence categories reveals that the impact of board independence on

performance is more when the board independence is up to 50 percent.

• Some of the control variables had a significant effect on the corporate

performance. The control variables like leverage and risk have a significant

negative while size a significant positive effect on performance.

5.2 Implications and Suggestions

The empirical findings put forth by the study highlight the role ownership structure plays

in corporate performance, in an emerging economy such as India. The legal and

institutional environment which influences ownership structures, business practices and

enforcement standards has also been discussed. The study offers governance researchers

an opportunity to appreciate the applicability and limitations of the existing governance

framework. It also affords insights to policy makers interested in improving corporate

governance systems in the context of unique institutional, legal and regulatory setting.

It is evident that the regulatory bodies of India have proposed comprehensive and

rigorous corporate governance reforms which lay emphasis on the significance of the

credibility and integrity of listed companies, the responsibilities of directors and

management, the protection of minority shareholders, and comprehensive disclosures.

However, there are major gaps and lapses in the implementation of governance rules.29

The lax governance environment can be attributed to weak enforcement mechanisms. As

pointed out earlier the development of a corporate governance system by itself would not 29 Bureau (2007) “SEBI Proceeds Against 20 Companies for not Complying with Clause 49 Norms,” Business Line, Wednesday, September 12.

Conclusion and Recommendations

150

deliver every reform goal until and unless related changes are not brought about at the

macro- and micro-levels. Firstly, the Government of India should establish a definite

mandate for each regulatory agency, thereby strengthening the enforcement mechanisms.

Secondly, there is an urgent need to revamp the judicial system so as to deliver fast

justice and increase judicial efficiency. Some steps have been taken by the judiciary to

develop ‘human rights jurisprudence’ within the framework of corporate India.

Companies, for example, are required to set in place internal systems as recommended by

the Supreme Court to prevent sexual harassment at the workplace. Thirdly, there is also a

need to implement more robust bankruptcy laws so that they are predictable, transparent

and affordable. Lastly, effective government reforms also require determined efforts by

government to clamp down on corruption.

Since India embarked on liberalization in the early 1990s, it has increasingly

integrated into the global economy. A phenomenon of institutionalization of wealth

wherein institutional investors especially foreign institutional investors are consolidating

their holdings is quite apparent from the study. This growth of shareholding is expected

to have a pervasive influence on corporate governance on two accounts. First, foreign

institutional investors seek to preserve their global integrity and therefore maintain higher

governance standards in their operations. Second, they have greater ability to enforce

governance rules because of their expertise and experience over the years.

Effective corporate governance mechanisms include both internal mechanisms,

such as board of directors and its major committees, and external mechanisms such as

hostile takeover bids, leveraged buyouts, proxy contests, legal protection of minority

shareholders, and the disciplining of managers in the external labour market (Dharwadkar

et al, 2000). The corporate governance reforms in India have mainly focused on internal

Conclusion and Recommendations

151

governance mechanisms, emphasizing the responsibilities of directors and management

and the necessity of transparency. There is further absence of the phenomenon of

activism by shareholders as a factor influencing change in corporate governance. The

extremely high ownership concentration makes hostile takeovers and leveraged buyouts

unlikely to occur. So as long as the management can appease the dominant shareholders

effective implementation of governance reforms cannot be expected in India.

The major governance challenge in India is unaddressed conflicts between the

dominant shareholders and the minority shareholders. The findings underline that

promoters (together with persons acting in concert) are dominant shareholders followed

by institutional investors. The individuals were the least significant investor type in terms

of large stakes. Since board derives its power from dominant shareholders, disciplining

the latter by the former is not feasible resulting in the ineffectiveness of the board. No

doubt the empirical results put forth inconclusive affect of board composition on

corporate performance. There thus exists a dual challenge of resolving conflict between

not only the shareholders and management but also between dominant shareholders and

minority shareholders.

The study suggests that it is not only the distribution of ownership but also the

types of large shareholders that have a significant impact on performance. There is

evidence that higher promoter (both Indian and foreign) ownership is beneficial to the

company as it improves firm performance and positively affects value. It seems the

ownership structure of Indian companies, reduces agency conflicts but can result in self-

seeking behaviour and pursuit of private gains of control. Some of these private benefits,

like a reputation, strengthens the large shareholders’ incentives and impose no costs on

minority shareholders, while others like self-dealing, self-aggrandizement may dilute the

Conclusion and Recommendations

152

value of their stock. The more important the latter type of benefits is in a particular

company, the greater are the risks that a controlling shareholder will make decisions that

will undermine the value of the firm. Corporate governance policy should therefore aim

to strengthen the non-diluting private benefits and restrict the scope for dilution.

The major part of the debate on corporate governance pertains to board

composition especially board size and independence. Firstly, there is the question of

enhancing the independence of the board of directors. The introduction of independent

directors is an important arrangement in monitoring the effectiveness of board of

directors. The study puts forth inconclusive effect of board independence on corporate

performance. It is therefore imperative to improve effectiveness of independent directors

in monitoring managers especially to strengthen their independence. A major issue,

however, is the limited availability of trained independent directors who are well versed

with the procedures, tasks and responsibilities expected of them. One solution to this

challenge is business leadership training of existing and potential independent directors in

India.30 Another solution to the shortage of qualified independent directors is to consider

appointing foreign directors. Further, independent directors have to be motivated to carry

out due diligence by making their liabilities credible. Secondly, regarding the board size,

the study recommends smaller boards. Rather than having a large number of board

members, it is suggested to bring in a few with the required expertise and knowledge to

efficiently run the company.

Sound functioning corporate governance mechanisms are of crucial importance

for both local companies and foreign investors so as to tap tremendous opportunities for

30 The ICAI has commenced with the ‘Training Programme on Independent Directors’ for the benefit of those who wish to join the profession of independent directors or who are already in the profession.

Conclusion and Recommendations

153

investment and growth which the Indian economy provides. Eventually, governance

reforms in India will only prove effective if many more companies and all relevant

regulatory bodies strictly implement these, or similar provisions. This implies that efforts

to raise corporate governance need to be accompanied by a stronger enforcement of the

legal framework so as to bring stability in its capital markets and foster investor

confidence.

5.4 Prospects for Future Research

Notwithstanding the limitations, the study is relevant and timely given the increasing

importance of corporate governance across the globe in general and India in specific. The

findings provide researchers and others valuable understanding regarding the effect of

differences in the shareholding pattern on governance and performance. Given the certain

contradictory results presented in the present study and certain prior studies using Indian

data, it is evident that there are many issues relating to the relationship amongst

ownership structure, corporate governance and performance, which remain unresolved.

Future studies may further explore into other governance-specific variables (for example,

CEO duality, board skill, etc.) and their relationship with performance.

Many recent studies have suggested that national culture may have a significant

effect on corporate behaviour and performance (Li et al., 2001). Therefore, studying the

effects of culture on corporate governance can provide interesting and reliable

information enabling better understanding of governance issues in India. It may be then

feasible for the field to contribute ideas to improve the confidence and wellbeing of

investors at large.

Bibliography

154

Bibliography Abor, J. and N. Biekpe (2007) “Corporate Governance, Ownership Structure and

Performance of SMEs in Ghana: Implications for Financing Opportunities,” Corporate Governance, 7(3), 288-300.

Aghion, P. and O. Blanchard (1998) “On Privatization Methods in Eastern Europe and their Implications,” Economics of Transition, 6(1), 87-99.

Agrawal, A., and C. Knober (1996) “Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders,” Journal of Financial and Quantitative Analysis, 31, 377–397.

Alchian, A. A. (1965) “Some Economics of Property Rights,” IL Politico, 30, 816-829.

Allen, F. (1993) Stock Market and Resource Allocation, in C. Mayer and X. Vives (eds.) Capital Markets and Financial Intermediation, Cambridge: Cambridge University Press.

Allen, F. and D. Gale (2000) Comparing Financial Systems. Cambridge Mass: The MIT Press.

Allen, F., R. Chakrabarti, S. De, J. Qian and M. Qian (2006) Financing Firms in India, Working paper, The Wharton School, Available at http://fic.wharton.upenn.edu/fic/papers/07/0736.

Anderson, R.C. and D.M. Reeb (2008) “Founding-Family Ownership and Firm Performance: Evidence from the S&P 500,” The Journal of Finance, LVIII (3), June, 1301-1328.

Ang, J.S., R.A. Colwm and J. Wuh Lin (1999) “Agency Costs and Ownership Structure,” Journal of Finance, 55, 478–517.

Atanasov V., B. Black, C. Ciccotello and S. Gyoshev (2007) How Does Law Affect Finance: An Examination of Financial Tunnelling in an Emerging Market, Working Paper, January, Available at http://ssrn.com/abstract=902766.

Bajpai, G.N. (2004) The Securities Market. New Delhi: Global Business Press.

Band, R. (1981) “The Relationship between Return and Market Value of Common Stocks,” Journal of Financial Economics, 9, 3–18.

Bansal, C. L. (2005) Corporate Governance, New Delhi: Taxmann Allied Services (P) Ltd., Dec., 321-322.

Barca, F. (1995) On Corporate Governance in Italy: Issues, Facts, and Agenda, Unpublished Working Paper. Bank of Italy: Rome.

Bibliography

155

Bartlett, M.S. (1950) “Tests of Significance in Factor Analysis,” British Journal of Psychology, Statistical Section, 3, 77.

Bartlett, M.S. (1951) “A Further Note on Tests of Significance in Factor Analysis,” British Journal of Psychology, Statistical Section, 4, 1.

Baysinger B.D. and H. Butler (1985) “Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition,” Journal of Law, Economics, and Organization, 1(1), 101-124.

Becht, M. and A. Röell (1999) “Blockholdings in Europe: An International Comparison,” European Economic Review, 43, 1049-1056.

Bentler, P.M. (1968) “Alpha-Maximized Factor Analysis (Alphamax): It’s Relation to Alpha and Canonical Factor Analysis,” Psychometrika, 33, 335.

Berglof, E. and E. Perotti (1994) “The Governance Structure of the Japanese Financial Keiretsu,” Journal of Financial Economics, 36, 259–284.

Berle, A.A. and G. Means (1932) The Modern Corporation and Private Property, New York: The Macmillan Company.

Bertrand, M., P. Mehta, and S. Mullainathan (2002) “Ferreting out Tunnelling: An Application to Indian Business Groups,” Quarterly Journal of Economics, 117(1), 121–148.

Bhagat, S. and B. Black (1997) Do Independent Directors Matter? Working Paper, Columbia University.

Bhagat, S. and B. Black (2002) “The Non-Correlation between Board Independence and Long-term Firm Performance,” Journal of Corporation Law, 27(2), 232-273.

Bhasin, M (2008) “Corporate Governance Scenario in India: Perspectives and Prospects,” Executive Chartered Secretary, Feb., 126-133.

Bhattacharyya, A. K. and Rao, S. V. (2004) Economic Impact of Regulation on Corporate Governance: Evidence from India, Jan. 17. Indian Institute of Management Calcutta Working Paper No. 486/2004. Available at SSRN: http://ssrn.com/abstract=640842

Bianco, M. and P. Casavola (1999) “Italian Corporate Governance: Effects on Financial Structure and Firm Performance,” European Economic Review, 43, 1057-1069.

Black, B. S. and V. S. Khanna (2007) Can Corporate Governance Reforms Increase Firms’ Market Value: Event Study Evidence from India, ECGI Working Paper No. 159/2007, Available at http://ssrn.com/abstract_id=914440.

Bibliography

156

Black, B., H. Jang and W. Kim (2006a) “Predicting Firms’ Corporate Governance Choices: Evidence from Korea,” Journal of Corporate Finance, 12, 660-691.

Black, B., H. Jang and W. Kim (2006b), “Does Corporate Governance Affect Firms’ Market Values? Evidence from Korea,” Journal of Law, Economics and Organization, 22, 366-413.

Blasi, J. and A. Shleifer (1996) Corporate Governance in Russia: An Initial Look, in Frydman, Roman, Cheryl W Gray and Andrzej Rapaczynshil, eds. Corporate Governance in Central Europe and Russia. Volume 2, Insiders and the State, Budapest, Hungary: CEU Press.

Bohren, O. and B.A. Odegaard (2000) Patterns of Corporate Ownership: Insights from a Unique Data Set, Available at http://finance.bi.no/~bernt/papers/eierstru descriptive/bohren-odegaard-2001-nopec-patterns-of-corporate-ownership.pdf.

Bolton, P. and E.L. Von Thadden (1998) “Blocks, Liquidity and Corporate Control,” Journal of Finance, February, 53, 1-26.

Bose, S. (2005) “Securities Markets Regulation: Lessons from US and Indian Experience,” Money and Finance, Jan.-June, 83-124

Burkart, M., D. Gromb and F. Panunzi (1997) “Large Shareholders, Monitoring and the Value of the Firm,” Quarterly Journal of Economics, 112, 693-728.

Byrd, J.W. and K.A. Hickman (1992) “Do Outside Directors Monitor Managers? Evidence from Tender Offer Bids,” Journal of Financial Economics, 32(2), 195-221.

Cadbury, A. (2000) Family Firms and their Governance: Creating Tomorrow’s Company from Today’s, London: Eyon Zehnder International.

Carlin, W. (1999) The Empirical Analysis of Corporate Governance in Transition, in F. Boenker, E. Rosenbaum and H.J. Wagener (eds.), Privatization, Corporate Governance and the Emergence of Markets. Basingstoke: MacMillan.

Carlin, W., J. Van Reenen and T. Wolfe (1995) “Enterprise Restructuring in Early Transition: The Case Study Evidence,” Economics of Transition, 3(4), 427-458.

Caves, R. E. (1996) Multinational Enterprise and Economic Analysis. Cambridge MA: Cambridge University Press.

Chakrabarti, R., W. L. Megginson and P. K. Yadav (2008) “Corporate Governance in India,” Journal of Applied Corporate Finance, 20(1), Winter, 59-72.

Chakrarbarti, R., W. L. Megginson and P. K. Yadav (2007) “Corporate Governance in India,” Journal of Applied Corporate Finance, forthcoming, Available at http://ssrn.com/abstract=1012222.

Bibliography

157

Chen, C.J.P., Chen, S. and Su, X. (2001) “Is Accounting Information Value-relevant in the Emerging Chinese Stock Market?,” Journal of International Accounting, Auditing and Taxation, 10, 1-22.

Chen, C.R., W. Guo, and V. Mande (2003) Managerial Ownership and Firm Valuation: Evidence from Japanese Firms, Pacific-Basin Finance Journal, 11, 267–283.

Chen, J. (2001) “Ownership Structure as Corporate Governance Mechanism: Evidence from Chinese Listed Companies,” Economics of Planning, 34, 53-72.

Cheung, S. N. S. (1970) “The Structure of a Contract and the Theory of Non-exclusive Resource,” Journal of Law and Economics, 13, 49-70.

Cheung, S. N. S. (1983) “The Contractual Nature of the Firm,” Journal of Law and Economics, 26, 1-21.

Chibber, P. K., and S. K. Majumdar (1998) “State as Investor and State as Owner: Consequences for Firm Performance in India,” Economic Development and Cultural Change, 46(3), 561–580.

Chibber, P. K., and S. K. Majumdar (1999) “Foreign Ownership and Profitability: Property Rights, Control, and the Performance of Firms in Indian Industry,” The Journal of Law and Economics, XLII, 209–238.

Cho, M.H. (1998) “Ownership Structure, Investment, and the Corporate Value: An Empirical Analysis,” Journal of Financial Economics, 47, 103-21.

Chow, P. (2002) Invest in Corporate Governance: A Perspective from the HK Asset Management Industry, in 2002 Symposium on Corporate Governance and Disclosure: The Impact of Globalization, The School of Accountancy, The Chinese University of Hong Kong, February.

Claessens, S. (1997) “Corporate Governance and Equity Prices: Evidence from the Czech and Slovak Republics,” Journal of Finance, 52(4), 1641-1658.

Claessens, S. and S. Djankov (1999) “Ownership Concentration and Corporate Performance in the Czech Republic,” Journal of Comparative Economics, 27(3), 498-513.

Claessens, S., S. Djankov, and G. Pohl (1996) Ownership and Corporate Governance: Evidence from the Czech Republic, The World Bank, Washington, DC. Available at http://econ.worldbank.org/docs/660.pdf

Claessens, S., S. Djankov, J.P.H. Fan, and L.H.P. Lang (2002) “Disentangling the Incentive and Entrenchment Effects of Large Shareholdings,” Journal of Finance, 57(6), 2741-2771.

Bibliography

158

Cliff, N. and C.D. Hamburger (1967) “The Study of Sampling Errors in Factor Analysis by Means of Artificial Experiments,” Psychological Bulletin, 68, 430.

Coase, R. (1937) The Value of the Firm, Economica, 4, 386-405.

Coase, R. (1960) The Problem of Social Cost, The Journal of Law and Economics, 1, 1–44.

Cool, K. and I. Dierickx (1989) “Business Strategy, market Structure and Risk-Return Relationships: A Structural Approach,” Strategic Management Journal, 10, 507-522.

Credit Lyonnais Securities Asia (2003) CG Watch: Corporate Governance in Emerging Markets, April.

Cremer, J. (1995) “Arm’s Length Relationships,” Quarterly Journal of Economics, 110, 275-300.

Cui, H. and Y. T. Mak (2002) “The Relationship between Managerial Ownership and Firm Performance in High R&D Firms,” Journal of Corporate Finance, 8, 313-336.

Curcio, R. (1994) The Effect of Managerial Ownership of Shares and Voting Concentration on Performance, The Centre for Economic Performance DP No. 185, January, London School of Economics.

Daily C.M., J.L. Johnson, A.E. Ellstrand and D.R. Dalton (1998) “Compensation Committee Composition as a Determinant of CEO Compensation,” Academy of Management Journal, 41(2), 209-220.

Daily, C.M. (1995) “The Relationship between Board Composition and Leadership Structure and Bankruptcy Reorganization Outcomes,” Journal of Management, 21(6), 1041-1056.

Dallas, G. (2002) Evaluating Asian Corporate Governance in an International Context, in 2002 Symposium on Corporate Governance and Disclosure: The Impact of Globalization, The School of Accountancy, The Chinese University of Hong Kong, February.

Dalton, C. M. and D. R. Dalton (2005) “Board of Directors: Utilizing Empirical Evidence in Developing Practical Perceptions,” British Journal of Management, 16(1), 91-97.

Daniels, R. and I. MacIntosh (1991) “Toward a Distinctive Canadian Corporate Law Regime,” Osgoode Hall Law Journal, 29, 863-933.

Dasgupta, P. and L. Liu (2004) Subnational Reform in Business Regulatory Framework Experiences and Challenges in Select Indian States, March, Washington, DC: World Bank (April).

Bibliography

159

Davis, G.F. and T.A. Thompson (1994) “A Social Movement Perspective on Corporate Control,” Administrative Science Quarterly, 39, 141-173.

De Miquel A., J. Pindado, de la Torre Ch (2001) Ownership Structure and Firm Value: New Evidence from the Spanish Corporate Governance System, SSRN Working Paper No. 292282.

Delios, A. and P.W. Beamish (1999) “Geographic Scopes, Product Diversification, and the Corporate Performance of Japanese Firms,” Strategic Management Journal, 20, 711-727.

Demsetz, H. (1964) “The Exchange and Enforcement of Property Rights,” Journal of Law and Economics, 3, 11-26.

Demsetz, H. (1983) ‘The Structure of Ownership and the Theory of the Firm,” Journal of Law and Economics, 26, 375–390.

Demsetz, H. and B. Villalonga (2001) “Ownership Structure and Corporate Performance,” Journal of Corporate Finance, 7, 209-233.

Demsetz, H. and K. Lehn (1985) “The Structure of Corporate Ownership: Causes and Consequences,” Journal of Political Economy, 14, 1155–1177.

Dharmapala, D. and V. Khanna (2008) Corporate Governance, Enforcement and Firm Value: Evidence from India, March, Working Paper, Available at: http://ssrn.com/abstract=1105732

Dharwadkar, R., G. George, and P. Brandes (2000) “Privatisation in emerging Economies: An Agency Theory Perspective,” Academy of Management Review, 25(3), 650-669.

Djankov, S. and P. Murrell (2002) “Enterprise Restructuring in Transition: A Quantitative Survey,” Journal of Economic Literature, 40(4), 1202-1214.

Doidge, C., G. A. Karolyi and R. M. Stulz (2004) Why Do Countries Matter So Much for Corporate Governance, Working Paper, Available at http://ssrn.com/abstract=580883

Douma, S., R. George, and R. Kabir (2002) Foreign and Domestic Ownership, Business Groups and Firm Performance: Evidence from a Large Emerging Market, Titenburg University Working Paper, Available at http://arno.uvt.nl/show.cgi?fid=4403.

Drucker, P. (1992) The Practice of Management, London: Butterworth-Heinemann.

Durand, R., and V. Vargas (2003) Ownership, Organization, and Private Firms’ Efficient Use of Resources, Strategic Management Journal, 24 (7), 667-675.

Bibliography

160

Durnev, A., and E. H. Kim (2005) “To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation,” Journal of Finance, 60(3), 1461-1493

Edwards, J. and K. Fischer (1994) Banks: Finance and Investment in Germany, New York: Cambridge University Press.

Eggertsson, T. (1990) Economic Behaviour and Institutions. Cambridge: Cambridge University Press.

Eisenberg, M. (1976) The Structure of the Corporation: A Legal Analysis, Boston: Little, Brown and Co.

Eisenberg, T., S. Sundgren, and M.T. Wells (1998) “Larger Board Size and Decreasing Firm Value in Small Firms,” Journal of Financial Economics, 48, 35-54.

Elliott, P. (1972), The Sociology of the Professions, Macmillan, London

European Corporate Governance Network (1997) The Separation of Ownership and Control: A Survey of Seven European Countries, Preliminary Report to the European Commission, Volumes 1-4, European Corporate Governance Network, Brussels.

Fagernas S. (2007) How do Family Ties, Boards and Regulation Affect Pay at the Top? Evidence for Indian CEOs? Working Paper, University of Cambridge, Available at http://www.cbr.cam.ac.uk/pdf/WP335.pdf.

Fama, E. (1980) “Agency Problems and the Theory of the Firm,” Journal of Political Economy, 88, 288-307.

Fama, E.F. and M.C. Jensen (1983) “Separation of Ownership and Control,” Journal of Law and Economics, 26, 301-325.

Ferrell, A. (2004) Mandated Disclosure and Stock Returns: Evidence from the Over-the-Counter Market, Working Paper, Available at http://ssrn.com/abstract=500123.

Field, A. (2000) Discovering Statistics Using SPSS for Windows, London: Sage.

Fornell, C. and F.L. Bookstein (1982) “Two Structural Equation Models: LISREL and PLS Applied to Consumer Exit-Voice Theory,” Journal of Marketing Research, 19(4), 440-452.

Fosberg, R. (1989) “Outside Directors and Managerial Monitoring,” Akron Business and Economic Review, 20, 24-32.

Frank, J. and C. Mayer (2001) “Ownership and Control of German Corporations,” Review of Financial Studies, Oxford University Press for Society for Financial Studies, 14(4), 943-977.

Bibliography

161

Frydman, R., C. Gray, M. Hessel, and A. Rapaczynski (1999) “When Does Privatization Work? The Impact of Private Ownership on Corporate Performance in the Transition Economies,” Quarterly Journal of Economics, 114(4), 1153-1191.

Garg, A. K. (2007) “Influence of Board Size and Independence on Firm Performance: A Study of Indian Companies,” Vikalpa, 32(3), July-Sept., 39-60.

Ghosh S. (2006) “Do Board Characteristics Affect Firm Performance? Firm Level Evidence from India,” Applied Economic Letters, 13, 435-443.

Gill, A. (2002) “Corporate Governance and Performance,” Corporate Governance International, September, 28-49.

Gilson, S. (1997) “Transaction Costs and Capital Structure Choice: Evidence from Financial Distressed Firms,” Journal of Finance, 52, 161–195.

Gollakota, K. and V. Gupta (2006) “History, Ownership Forms and Corporate Governance in India,” Journal of Management History, 12(2), 186-198.

Gorton, G. and F. Schmid (1996) Universal Banking and the Performance of German Corporations, NBER Working Paper 5453, National Bureau of Economic Research, Cambridge, Massachusetts.

Gorton, G. and F.A. Schmid (2000) “Universal Banking and the Performance of German Firms,” Journal of Financial Economics, 58, 29-80.

Goswami, O. (2000) The Tide Rises Gradually: Corporate Governance in India, Paper presented at the OECD Development Centre Informal Workshop on Corporate Governance in Developing Countries and Emerging Economies, Available at http://www.oecd.org/dataoecd/6/47/1931364.pdf.

Goswami, O. (2002), “Corporate Governance in India,” Taking Action Against Corruption in Asia and the Pacific (Manila: Asian Development Bank), 85-106.

Greenstone, M., A. Vissing-Jorgensen, and P. Oyer, (2005) “Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments,” Quarterly Journal of Economics, Forthcoming, Available at SSRN: http://ssrn.com/abstract=789865

Grosfeld, I. and J.-F. Nivet (1999) “Insiders and Wage Setting in Transition: Evidence from a Panel of Large Polish Firms, 1988-1994,” European Economic Review, 43.

Grossman, S. and O. Hart (1980) “Takeover Bids, the Free Rider Problem, and the Theory of the Corporation,” Bell Journal of Economics, 11, 42–64.

Grossman, S. and O. Hart (1988) “One Share One Vote and the Market for Corporate Control,” Journal of Financial Economics, 20, 175–202.

Bibliography

162

Gugler, K. (2001) Corporate Governance and Economic Performance, Oxford: Oxford University Press.

Guilford, J.P. (ed.) (1956) Fundamental Statistics in Psychology and Education, New York: McGraw-Hill.

Gupta, N. (2001) Partial Privatization and Firm Performance, William Davidson Institute Working Paper: 426.

Guttman, L (1940). “Multiple Rectilinear Prediction and the Use Resolution into Components,” Psychometrika, 5, 75-99.

Habib, M.A. and A.P. Ljungquist (2000) Firm Value and Managerial Incentives: A Stochastic Frontier Approach, London Business School Working Paper.

Hambrick, D.C. and E.M. Jackson (2000) Ownership Structure, Boards and Directors, Paper presented at the August 2000 meeting of the Academy of Management, Toronto.

Hart, O. (1983) “The Market Mechanism as an Incentive Scheme,” Bell Journal of Economics, 14, 366-382.

Heinrich, R.P. (2000) Complementarities in Corporate Governance: Ownership Concentration, Capital Structure, Monitoring and Pecuniary Incentives. Kiel Working Paper No. 968.

Hermalin, B.and M. Weisbach (1991) “The Effects of Board Composition and Direct Incentives on Form Performance,” Financial Management, 20(4), 101-112.

Hill, J.G. (1999) “Deconstructing Sunbeam- Contemporary Issues in Corporate Governance,” The Company and Securities Law Journal, Available at SSRN: http://ssrn.com/abstract=166893 or DOI: 10.2139/ssrn.166893

Himmbelberg, C.P., R.G. Hubbard and D. Palia (1999) “Understanding the Determinants of Managerial Ownership and the Link between Ownership and Performance,” Journal of Financial Economics, 53, 353-384.

Holderness, C.G. (2003) “A Survey of Blockholders and Corporate Control,” FRBNY Economic Policy Review, 9(1), 51-64.

Holmström, B. and J. Tirole (1993), “Market Liquidity and Performance Monitoring,” Journal of Political Economy, 51, 678-709.

Horn, J.L. (1967) “On Subjectivity in Factor Analysis,” Educational and Psychological Measurement, 27, 811.

Bibliography

163

Hoskisson, R.E., R.A. Johnson and D.D. Moesel (1994) “Corporate Divestiture Intensity in Restructuring Firms: Effects of Governance, Strategy, and Performance,” Academy of Management Journal, 37(5), 1207-1251.

Hovey, M., L. Li, and T. Naughton (2003) “The Relationship between Valuation and Ownership of Listed Firms in China,” Corporate Governance, 11(2), 112-122.

Humphreys, L.G., D. Ilgen, D. Mc Grath, and R. Montanelli (1969) “Capitalization on Chance Rotation of Factors,” Educational and Psychological Measurement, 24, 259.

Iacobucci, E. and M. Trebilcock (1996) Value for Money: Executive Compensation in the 1990s, Toronto: C.D. Howe Institute.

Jacobson, R. (1987) “The Validity of ROI as a Measure of Business Performance,” American Economic Review, 77(3), 470-478.

Jensen, M. and W. Meckling (1976) “Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure,” Journal of Financial Economics, 3, 305–360.

Jensen, M.C. (1989) “Eclipse of the Public Corporation,” Harvard Business Review, Sept.-Oct., Available at SSRN: http://ssrn.com/abstract=146149 or DOI: 10.2139/ssrn.10.2139/ssrn.146149

Jensen, M.C. (1993) “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems,” Journal of Finance, 48, 831-880.

Jog, V, and A. Tulpule (1996) Control and Performance: Evidence from the TSE 300. In Corporate Decision-making in Canada, ed. R. Daniels and R. Morck. Calgary: University of Calgary Press.

Joh, S.W. (2003) “Corporate Governance and Firm Profitability: Evidence from Korea before the Economic Crisis,” Journal of Financial Economics, 68(2), 287-322.

Johnson, S., P. Boone, and A. Breach (2000) “Corporate Governance in the Asian Financial Crisis, 1997-98,” Journal of Financial Economics, 58(1-2), October, 141-186.

Kaiser, H.F. (1958) “The Varimax Criterion for Analytic Rotation in Factor Analysis,” Psychometrika, 23, 187.

Kali, R and J Sarkar (2007) Diversification and Tunelling: Evidence from Indian Business Groups, Working Paper, Indira Gandhi Institute of Development Studies.

Kang, J. and A. Shivdasani (1995) “Firm Performance, Corporate Governance, and Top Executive Turnover in Japan,” Journal of Financial Economics, 38, 29–58.

Bibliography

164

Karpoff, J., P. Malatesta, and R. Walkling (1996) “Corporate Governance and Shareholder Initiatives: Empirical Evidence,” Journal of Financial Economics, 42, 365-395.

Khanna, T. and K. Palepu (2005) “The Evolution of Concentrated Ownership in India: Broad Patterns and a History of the Indian Software Industry,” in Morck, R. (Eds), The History of Corporate Governance around the World: Family Business Groups to Professional Managers, Chicago: University of Chicago Press, IL.

Khanna, T., K. Palepu (2000) “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups,” Journal of Finance, 55(2), 867-871.

Khanna, T., K. Palepu (2001) “Governance in India and Around the Globe,” HBS Working Knowledge, Available at http://hbswk.hbs.edu/item/2658.html.

Khanna, T., K. Palepu (2005) “The evolution of concentrated ownership in India: broad patterns and a history of the Indian software industry,” in Morck, R. (Eds),The History of Corporate Governance around the World: Family Business Groups to Professional Managers, Chicago: University of Chicago Press, IL.

Klien, A. (1998) “Firm Performance and Board Committee Structure,” Journal of Law and Economics, 41(1), 275-299.

Kole, S. (1996) “Managerial Ownership and Firm Performance: Incentives or Rewards?” Advances in Financial Economics 2, 119-149.

Kole. S. and Lehn, K. (1997) “Deregulation, the Evolution of Corporate Governance Structure, and Survival,” The American Economic Review, 87(2), 421-425.

Kosnik, R.D. (1990) “Effects of Board Demography and Director’s Incentives on Corporate Greenmail Decisions,” Academy of Management Journal, 33, 129-51.

Kumar, J. (2004) Does Ownership Structure Influence Firm Value? Evidence from India, December, Available at http://www.stmarys.ca/academic/commerce/economic/IAFEP /papers /kumar.pdf.

La Porta, R., F. Lopez-de-Silanes and A. Shleifer (1998) “Corporate Ownership around the World,” Journal of Finance, 54, 842–893.

La Porta, R., F. Lopez-de-Silanes and A. Shleifer (1998) “Law and Finance,” Journal of Political Economy, 106, 1113-5.

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, R. Vishny (2000) “Investor Protection and Corporate Governance,” Journal of Financial Economics, 58, 3-27.

La Porta, R., F. Lopez-de-Silanes, and A. Shleifer (2006) “What Works in Securities Laws,” Journal of Finance, Vol. 61, 1-32.

Bibliography

165

La Porta, R., F. Lopez-de-Silanes, A. Shleifer, R. Vishny (2002) “Investor Protection and Corporate Valuation,” Journal of Finance, 57, 1147-70.

Lang, L.H.P. and R.M. Stulz (1994) “Tobin’s q, Corporate Diversification, and Firm Performance,” Journal of Political Economy, 102, 1248-1281.

LaPorta, R., F. Lopez-de-Silanes, and A. Shleifer (1999) “Corporate Ownership around the World,” Journal of Finance, 54, 471-517.

Lawley, D.N. and A.E. Maxwell (ed.) (1973). Factor Analysis as a Statistical Method, London: Butterworth.

Lawrence, S.P. and G. Stapledon (1999) Is Board Composition Important? A Study of Listed Australian Companies, Available at http://papers.ssrn.com/so13/papers.cfm?abstract_id=193528.

Lee, S. (2008) Ownership Structure and Financial Performance: Evidence from Panel Data from South Korea, Working Paper No. 2008-17, July, Available at http:// www.econ.utah.edu

Leech, D. and J. Leahy (1991) “Ownership Structure, Control Type Classifications and the Performance of Large British Companies,” The Economic Journal, 101, 1418-1437.

Lemmon, M. and K. Lins (2003) “Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis,” Journal of Finance, 58(4), 1445-1468.

Li, J. T. (1994) “Ownership Structure and Board Composition: A Multi Country Test of Agency Theory Predictions,” Managerial and Decision Economics, 15(4), 359-369.

Li, J., K. Lam, G. Quian (2001) “Does Culture Affect Behaviour and Performance of Firms: The Case of Joint Venture in China,” Journal of International Business Studies, 32 (1), 115-131.

Li, J., K. Lam, G. Quian, and Y. Fang (2006) “The Effects of Institutional Ownership on Corporate Governance and Performance: An Empirical Assessment in Hong Kong,” Management International Review, 46(3), 259-276.

Lipton, M. and J. Lorsch (1992) “A Modern Proposal for Improved Corporate Governance,” Business Lawyer, 48(1), 59-77.

Litvak, K. (2007a), The Effect of the Sarbanes-Oxley Act on Non-US Companies Cross- Listed in the US, Working paper, Available at http://ssrn.com/abstract=876624.

Loderer, C. and K. Martin (1997) “Executive Stock Ownership and Performance: Tracking Faint Traces,” Journal of Financial Economics, 45, 223-55.

Bibliography

166

Lopez-de-Salinas, F., Shleifer, A., Vishny, R. (1997) “Privatization in the United States,” Rand Journal of Economics, 28(3), 447-71.

Lopez-Iturriaga, F.J. and J.A. Rodriguez-Sanz (2001) “Ownership Structure, Corporate Value and Firm Investment: A Simultaneous Equation Analysis of Spanish Companies,” Journal of Management and Governance, 5, 179–204.

Luoma, P. and J. Goodstein (1999) “Stakeholders and Corporate Board: Institutional Influences on Board Composition,” Academy of Management Journal, 42(5), 553-563.

Mallette, P. and K.L. Fowler (1992) “Effects of Board Composition and Stock Ownership on the Adoption of Poison Pills,” Academy of Management Journal, 35(5), 553-563.

Manne, H. (1965) “Mergers and the Market for Corporate Control,” Journal of Political Economy, 73, 110-20.

Maug, E. (1998) “Large Shareholders as Monitors: Is There a Trade-off between Liquidity and Control?” Journal of Finance, 53, 65-92.

McConnell, J. and H. Servaes (1990) “Additional Evidence on Equity Ownership and Corporate Value,” Journal of Financial Economics, 27, 595-612.

McGee, R.W. (2008) Corporate Governance in Asia: Eight Case Studies, Working Paper, Florida International University, Available at: http://ssrn.com/abstract=1081954

McKinsey (2001) Giving New Life to the Corporate Governance Reform Agenda for Emerging Markets, Available at http://www.mckinsey.com/clientservice/organizationleadership/service/corpgovernance/pdf/EmergingMarketOpinion.pdf.

Megginson, W. L., and J. M. Netter (2001) “From State to Market: A Survey of Empirical Studies on Privatization,” Journal of Economic Literature, XXXIX, 321–389.

Mikkelson, W.W. and M.M. Partch (1989) “Managers’ Voting Rights and Corporate Control,” Journal of Financial Economics, 25, 263-290.

Milgrom, P. and J. Roberts (1992) Economics, Management and Organisation, Englewood Cliffs, NJ: Prentice Hall.

Milton, H. and A. Raviv (1991) “The Theory of Capital Structure,” The Journal of Finance, 46(1), March, 297-355.

Mintzberg, H. (1983) Power in and Around Organizations, Prentice-Hall: Englewood Cliffs, NJ.

Bibliography

167

Mittal, S and R. Kansal (2007) “The Ownership Structure Determinants and Impact on Corporate Performance,” The Indian Journal of Commerce, 60(1), Jan.-Mar., 10-19.

Mohanty, P. (2002) Institutional Investors and Corporate Governance in India, NSE Research Project, September, available at http://www.nseindia.com/content/research/Paper42.pdf

Morck, R., A. Shleifer and A. Vishny (1988) “Management Ownership and Market Valuation: An Empirical Analysis,” Journal of Financial Economics, 20, 293–513.

Monsen, J. R., J.S. Chiu, and D.E. Cooley (1968) “The Effect of Separation of Ownership and Control on the Performance of the Large Firm,” Quarterly Journal of Economics, June, 435-451.

Mueller, D.C. and E.A. Reardon (1993) “Rates of Return on Corporate Investment,” Southern Economic Journal, 60(2), 430-453.

Murali, R. and J.B. Welch (1989) “Agents, Owners, Control and Performance,” Journal of Business Finance and Accounting, 16, 385-98.

Nenova, T. (2006) “Control Values and Changes in Corporate Law in Brazil,” Latin American Business Review, Forthcoming, Available at http://ssrn.com/abstract=294064.

Netter, J. M. and M. L. Mitchell (1989) “Stock Repurchase Announcements and Insider Transaction after the October 1987 Stock Market Crash,” Financial Management, 18(3), Autumn, 84-96.

Nickell, S.J., D. Nicolitsas and N. Dryden (1997) “What Makes Firm Perform Well?” European Economic Review, 41, 783- 796.

North, D.C. (1981) Structure and Change in Economic History. New York: Norton

North, D.C. (1990) Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press.

Nunnally, J.C. (ed.) (1969, 1979) Psychometric Theory, New York: McGraw-Hill.

OECD (2006) Methodology for Assessing the Implementation of the OCED Principles on Corporate Governance, December, Available at http://www.oecd.org/daf/corporate-affairs.

Patibandla, M. (2002) Equity Pattern, Corporate Governance and Performance: A Study of Indian Corporate Sector, Copenhagen Business School, Working Paper.

Bibliography

168

Patibandla, M. (2006) “Equity Pattern, Corporate Governance and Performance: A Study of Indian Corporate Sector,” Journal of Economic Behaviour and Organization, 59(1), January, 29-44.

Pattanayak, M. (2008) “Insider Ownership and Firm Value,” MPRA Paper No. 10971, September, Available at http://mpra.ub.uni-muenchen.de/10971.

Pedersen, T. and S. Thomsen (1999) “Economic and Systemic Explanations of Insider Ownership among Europe’s Largest Companies,” International Journal of the Economics of Business, 6(3), 367–381.

Pennell, R. (1968) “The Influence of Communality and N on the Sampling Distribution of Factor Loadings,” Psychometrika, 33, 423.

Pfeffer, J and G.R. Salancik (1978) The External Control of Organizations: A Resource Dependence Perspective, New York: Harper and Row Publishers.

Phani, B. V., V. N. Reddy, N. Ramachandran, and A. K. Bhattacharya (2004) Insider Ownership, Corporate Governance and Corporate Performance, NSE Research Project, July, Available at http://www.nseindia.com/content/research/comppaper89.pdf

Prowse, S. (1994) Corporate Governance in an International Perspective: A Survey of Corporate Governance Mechanism among Large Firms in the United States, the United Kingdom, Japan and Germany, BIS Economic Papers, No.41, May.

Prowse, S.D. (1992) “The Structure of Corporate Ownership in Japan,” Journal of Finance, 47(3), 1121-1140.

Publication, O. (2001) Corporate Governance in Asia: A Comparative Perspective, OECD.

Rajagopalan, N. and Y. Zhang (2007) “Corporate Governance Reforms in China and India: Challenges and Opportunities,” Business Horizons, 51, 55-64

Ramaswamy, K. (2001) “Organisational Ownership, Competitive Intensity, and Firm Performance: An Empirical Study of the Indian Manufacturing Sector,” Strategic Management Journal, 22, 989-998.

Ramaswamy, K., M. Li, and L. Gomes (2002) “Variations in Ownership Behavior and Propensity to Diversify: A Study of the Indian Corporate Context,” Strategic Management Journal, 23, 345-358.

Ramaswamy, K., R. Veliyath, and L. Gomes (2000) “A Study of the Determinants of CEO Compensation in India,” Management International Review, 40(2), 167-191.

Bibliography

169

Rao, K. S. C. and A. Guha (2006) Ownership Pattern of the Indian Corporation Sectors Implications for Corporate Governance, ISID, Working Paper No. 2006/09, Sept., 6-10, Available at http://isidev.nic.in/pdf/WP0703.pdf.

Rao, P.S., and C. Lee-Sing (1996) Governance Structure, Corporate Decision-making, and Firm Performance in North America. In Corporate Decision-making in Canada, ed. R. Daniels and R. Morek, Calgary: University of Calgary Press.

Reddy, Y. V. (2002) “Public Sector Banks and the Governance Challenge: Indian Experience,” RBI Bulletin, Available at http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?id=3550.

Reed, A. (2002) “Corporate Governance Reforms in India,” Journal of Business Ethics, 37, 249-68.

Reinganum, M. (1981) “Misspecification of Capital Asset Pricing: Empirical Anomalies based on Earnings’ Yields and Market Values,” Journal of Financial Economics, 9, 19–46.

Roe, M. (1991) “A Political Theory of Corporate Finance,” Columbia Law Review, 1(10), 10–67.

Rosenstein, S. and J. Wyatt (1990) “Outside Directors, Board Effectiveness and Shareholders’ Wealth,” Journal of Financial Economics, 26, 175-91.

Sanchez, J.P. and E. Garcia (2007) “Ownership Structure, Discretionary Accruals and the Informativeness of Earnings,” Corporate Governance: An International Review, 15(4), July, 677-691.

Sarkar, J. and S. Sarkar (2003) Liberalization, Corporate Ownership and Performance: The Indian Experience (with Subrata Sarkar), in Corporate Capitalism in South Asia edited by Ananya Mukherjee-Reed, International Political Economy Series (ed by Timothy M. Shaw), UK: Macmillan Press.

Sarkar, J. and S. Sarkar (2005) Multiple Board Appointments and Firm Performance in Emerging Economies: Evidence from India, Working Paper 2005-001, Indira Gandhi Institute of Development Research, Mumbai, India.

Sarkar, J., S. Sarkar and K. Sen (2006) Board of Directors and Opportunistic Earnings Management: Evidence from India, Working Paper, Indira Gandhi Institute of Development Research, Mumbai, India.

Sarkar, S. and J. Sarkar (2000) “Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India,” International Review of Finance, 1(3), 161-194.

Selarka, E. (2005) “Ownership Concentration and Firm Value: A Study from the Indian Corporate Sector,” Emerging Markets Finance and Trade, 41, 83-108.

Bibliography

170

Shleifer, A. and D. Wolfenson (2002) “Investor Protection and Equity Markets,” Journal of Financial Economics, 66, 3-27.

Shleifer, A. and W. Vishny (1986) “Large Shareholders and Corporate Control,” Journal of Political Economy, 94, 461–488.

Shleifer, A. and W. Vishny (1997) “A Survey of Corporate Governance,” Journal of Finance, 52, 737–783.

Short, H. (1994) “Ownership, Control, Financial Structure and the Performance of Firms,” Journal of Economic Surveys, 8 (3), 203-249.

Short, H. and K. Keasey (1999) “Managerial Ownership and the Performance of Firms: Evidence from the UK,” Journal of Corporate Finance, 5, 79-101.

Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, New York: Modern Library (2000).

Smith, G. P. (2007) A Look at the Impact of Sarbanes-Oxley on Cross-Listed Firms, Working Paper, Available at http://ssrn.com/abstract=931051.

Sparrow, O. (1993) Management Options: Identifying Choices for Medium-sized Enterprises, London: Shell UK Ltd.

Stigler, G. J. and C. Fridland (1983), “The Literature of Economics: The Case of Berle and Means,” The Journal of Law and Economics, 26, 237-268.

Stijn C. and J. P. H. Fan, (2002) “Corporate Governance in Asia: A Survey,” International Review of Finance, 3(2), 71-103.

Stulz, R. (1988) “Managerial Control of Voting Rights, Financing Policies, and the Market for Corporate Control,” Journal of Financial Economics, 2, 25-54.

Sundaramurthy, C. and P. Rechner (1997) “Conflicting Shareholder Interests: An Empirical Analysis of Fair Price Provisions,” Business and Society, 36, 73-87.

The Economic Survey (2007-08) Available at http://indiabudget.nic.in/es2007-08/esmain.htm

The Economists, “Asian Business: In Praise of Rules,” April 7, 2001, 2-18.

Thomsen, S. and T. Pedersen (1998) “Industry and Ownership Structure,” International Review of Law and Economics, 18(4), 385-402.

Thomsen, S. and T. Pedersen (2000) “Ownership Structure and Economic Performance in the Largest European Companies,” Strategic Management Journal, 21, 689-705.

Tobin, J. (1969) “A General Equilibrium Approach to Monetary Theory,” Journal of Money, Credit, and Banking, 1, 15–29.

Bibliography

171

Tobin, J. and W. Brainard (1968) “Pitfalls in Financial Model Building,” American Economic Review, 59, 99–102.

Topalova, P. (2004) Overview of the Indian Corporate Sector: 1989-2002. IMF Working Paper No. 04/64. Available at http://www.imf.org/external/pubs/ft/wp/2004/wp0464.pdf.

Triantis, G. (1996) “Debt Financing, Corporate Decision Making, and Security Design,” Canadian Business Law Journal, 26, 93-105.

Triantis, G., and R. Daniels (1995) “The Role of Debt in Interactive Corporate Governance, California Law Review, 83, 1073-1113.

Tsui, A.S., T.D. Egan, and C.A. O’Reilly III (1992) “Being Different: Relational Demography and Organizational Attachment,” Administrative Science Quarterly, 37(3), 549-579.

Tuschke, A., and G. Sanders (2003) “Antecedents and Consequences of Corporate Governance Reform: The Case of Germany,” Strategic Management Journal, 24 (7), 631-649.

Varma, J. R. (1997) “Corporate governance in India: disciplining the dominant shareholder,” IIM-B Management Review, 9(4), 5-18.

Veblen, T. (1921) The Engineers and the Price System, New York: Viking.

Wiwattanakantang, Y. (1999) “An Empirical Study on the Determinants of the Capital Structure of Thai Firms,” Pacific-Basin Finance Journal, 7, 371-403.

World Bank (2003a) India: Sustaining Reform, Reducing Poverty. Washington, DC: World Bank & IMF (June).

World Bank (2008) Doing Business in 2008, Available at http://www.doingbusiness.org/documents/FullReport/2008/DB08_Full_Report.pdf

World Bank and International Monetary Fund (2003b). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Republic of Korea. Washington, DC: World Bank & IMF (September).

World Bank and International Monetary Fund (2004a). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: India. Washington, DC: World Bank & IMF (April).

World Bank and International Monetary Fund (2004b). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Republic of Indonesia. Washington, DC: World Bank & IMF (August).

Bibliography

172

World Bank and International Monetary Fund (2005a). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Malaysia. Washington, DC: World Bank & IMF (June).

World Bank and International Monetary Fund (2005b). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Pakistan. Washington, DC: World Bank & IMF (June).

World Bank and International Monetary Fund (2005c). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Thailand. Washington, DC: World Bank & IMF (June).

World Bank and International Monetary Fund (2006a). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Philippines. Washington, DC: World Bank & IMF (May).

World Bank and International Monetary Fund (2006b). Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment: Vietnam. Washington, DC: World Bank & IMF (June).

Wruck, K.H. (1989) “Equity Ownership Concentration and Firm Value: Evidence from Private Equity Financings,” Journal of Financial Economics, 23, 3-28.

Xu, X. and Y. Wang (1997) Ownership Structure, Corporate Governance, and Corporate Performance: The Case of Chinese Stock Companies, Policy Research Working Paper 1794, The World Bank, Economic Development Institute, Office of Director, Washington DC.

Yee, H.S. (1998) “A Study on Relationship between Ownership and Return in Malaysia,” MBA thesis, University of Malaya, Kuala Lumpur.

Yeh, Y.H., T.S. Lee, and T. Woidtke (2001) “Family Control and Corporate Governance: Evidence from Taiwan,” International Review of Finance, 2, 21-48.

Yermack, D. (1996) “Higher Market Valuation of Companies with a Small Board of Directors,” Journal of Financial Economics, 40(2), 185-212.

Zeckhauser, R. and J. Pound (1990) Are Large Shareholders Effective Monitors? An Investigation of Share Ownership and Corporate Governance, in: R. Hubbard, ed., Asymmetric Information, Corporate Finance and Investment (University of Chicago Press, Chicago) 149-180.

Zeckhauser, R. and J. Pound (1990) Are Large Shareholders Effective Monitors? An Investigation of Share Ownership and Corporate Governance, in: R. Hubbard, ed., Asymmetric Information, Corporate Finance and Investment (University of Chicago Press, Chicago) 149-180.

Bibliography

173

Zingales, L. (1994) “The Value of the Voting Right: A Study of the Milan Stock Exchange Experience,” The Review of Financial Studies, 7, 125-48.

Zwiebel, J. (1995) “Block Investment and Partial Benefits of Corporate Control,” Review of Economic Studies, 62, 161–185.

Websites

http://www.bseindia.com

http://www.competition-commission-india.nic.in

http://www.finmin.nic.in

http://www.icai.org

http://www.irdaindia.org

http://www.mca.gov.in

http://www.rbi.org.in

http://www.sebi.gov.in

http://www.sec.gov

Appendix

174

APPENDIX I

Data Structure of BSE-200 Companies31

A. Banking Companies

S.No. Company Name 1 Allahabad Bank 2 Andhra Bank 3 AXIS Bank 4 Bank of Baroda 5 Bank of India 6 Bank of Maharashtra 7 Canara Bank 8 Centurion Bank of Punjab Ltd. 9 Corporation Bank 10 Federal Bank Ltd. 11 HDFC Bank Ltd. 12 ICICI Bank Ltd. 13 Indian Overseas Bank 14 IndusInd Bank Ltd. 15 Industrial Development Bank of India 16 ING Vysya Bank Ltd. 17 Jammu & Kashmir Bank Ltd. 18 Kotak Mahindra Bank Ltd. 19 Oriental Bank of Commerce 20 Punjab National Bank 21 State Bank of India 22 UCO Bank. 23 Union Bank of India 24 Vijaya Bank

B. Public Sector Companies

S.No. Sector Company Name 1 Capital Goods BEML32 2 Capital Goods Bharat Electronics Ltd. 3 Capital Goods Bharat Heavy Electricals Ltd. 4 Oil and Gas Bharat Petroleum Corporation Ltd. 5 Oil and Gas Bongaingaon Refinery & Petrochemicals 6 Oil and gas Chennai Petroleum Corporation Ltd. 7 Transport Services Container Corporation of India Ltd. 8 Capital Goods Dredging Corporation of India 9 Capital Goods Engineers India Ltd. Contd…

31 The index constituents as on June, 12 2006 32 Former Bharat Earth Movers Ltd.

Appendix

175

S.No. Sector Company Name 10 Oil and Gas G A I L (India) Ltd. 11 Metal, Metal Products and Mining Gujarat Mineral Development Corp. Ltd. 12 Oil and Gas Hindustan Petroleum Corporation Ltd. 13 Oil and Gas IBP Co. Ltd. 14 Finance IFCI Ltd. 15 Oil and Gas Indian Oil Corporation Ltd. 16 Oil and Gas Indraprastha Gas Ltd. 17 Oil and Gas Kochi Refineries Ltd. 18 Finance LIC Housing Finance Ltd. 19 Oil and Gas Mahanagar Telephone Nigam Ltd. 20 Oil and Gas Mangalore Refinery & Petrochemicals Ltd. 21 Power N T P C Ltd. 22 Metal, Metal Products and Mining National Aluminium Co. Ltd. 23 Power Neyveli Lignite Corporation Ltd. 24 Oil and Gas Oil & Natural Gas Corporation Ltd. 25 Oil and Gas Petronet LNG Ltd. 26 Power PTC India Ltd 27 Agriculture Rashtriya Chemical & Fertilizer Ltd. 28 Transport Services Shipping Corporation of India Ltd. 29 Metal, Metal Products and Mining Steel Authority of India Ltd. C. Companies Not Listed All Through 2000-2006

S.No. Sector Company Name 1 Telecom Bharti Airtel Ltd. 2 Healthcare Biocon Ltd. 3 Healthcare Divi’s Laboratories Ltd. 4 Information Technology I-Flex Solutions Ltd. 5 Housing Related Jaiprakash Associates Ltd. 6 Transport Services Jet Airways (India) Ltd. 7 Metal, Metal Products and Mining Jindal Stainless Ltd. 8 Transport Equipments Maruti Suzuki India Ltd.33 9 Media and Publishing New Delhi Television Ltd. 10 Information Technology Patni Computer Systems Ltd. 11 Capital Goods Suzlon Energy Ltd. 12 Information Technology Tata Consultancy Services Ltd. 13 Housing Related Ultratech Cement Ltd. D. Sample Companies (FY 2000-2001 to FY 2005-2006)

INDUSTRY TYPE: MANUFACTURING S.No. Sector Company Name

1 Capital Goods ABB Ltd. 2 Healthcare Abbott India Ltd. Contd...

33 Former Maruti Udyog Ltd.

Appendix

176

S.No. Sector Company Name 3 Housing Related ACC Ltd. 4 Diversified Aditya Birla Nuvo Ltd. 5 Textile Alok Industries Ltd. 6 Housing Related Ambuja Cements Ltd. 7 Transport Equipments Amtek Auto Ltd. 8 Transport Equipments Apollo Tyres Ltd. 9 Textile Arvind Ltd.34 10 Transport Equipments Asahi India Glass Ltd. 11 Transport Equipment Ashok Leyland Ltd. 12 Chemical and Petrochemical Asian Paints Ltd. 13 Healthcare Aurobindo Pharma Ltd. 14 Healthcare Aventis Pharma Ltd. 15 Transport Equipment Bajaj Auto Ltd. 16 Agriculture Bajaj Hindustan Ltd. 17 Miscellaneous Ballarpur Industries Ltd. 18 Agriculture Balrampur Chini Mills Ltd. 19 Transport Equipment Bharat Forge Ltd. 20 Housing Related Birla Corporation Ltd. 21 Textile Bombay Dyeing & Manufacturing Co. Ltd. 22 Capital Goods Bosch Ltd35 23 FMCG Britannia Industries Ltd. 24 Healthcare Cadila Healthcare Ltd. 25 Oil and Gas Castrol India Ltd. 26 Diversified Century Textiles & Industries Ltd.36 27 Power CESC Ltd. 28 Agriculture Chambal Fertilisers & Chemicals Ltd 29 Healthcare Cipla Ltd. 30 FMCG Colgate-Palmolive (India) Ltd. 31 Capital Goods Crompton Greaves Ltd. 32 Transport Equipment Cummins India Ltd. 33 FMCG Dabur India Ltd. 34 Healthcare Dr. Reddy’s Laboratories Ltd. 35 Transport Equipments Escorts Limited 36 Oil and Gas Essar Oil Ltd. 37 Metal, Metal Products and Mining Essar Steel Ltd. 38 Miscellaneous Essel Propack Ltd. 39 Healthcare FDC Ltd. 40 Chemical and Petrochemical Finolex Industries Ltd. 41 FMCG Gillette India Ltd. 42 Healthcare Glaxosmithkline Consumer Healthcare 43 Healthcare Glaxosmithkline Pharmaceuticals Ltd. 44 Healthcare Glenmark Pharmaceuticals Ltd. 45 FMCG Godrej Consumer Products Ltd. 46 Diversified Grasim Industries Ltd. 47 Chemical and Petrochemical Gujarat Alkalis & Chemicals Ltd. Contd..

34 Former Arvind Mills Ltd. 35 Former MICO Ltd. 36 Former Century Textiles

Appendix

177

S.No. Sector Company Name 48 Agriculture Gujarat Narmada Valley Fertilizer Co. Ltd. 49 Metal, Metal Products and Mining Gujarat NRE Coke Ltd. 50 Agriculture Gujarat State Fertilizers & Chem.Ltd 51 Information Technology HCL Infosystems Ltd 52 Transport Equipments Hero Honda Motors Ltd. 53 Metal, Metal Products and Mining Hindalco Industries Ltd. 54 FMCG Hindustan Unilever Ltd. 55 Metal, Metal Products and Mining Hindustan Zinc Ltd. 56 Housing Related India Cements Ltd. 57 Chemical and Petrochemical Indian Petrochemicals Corporation Ltd. 58 Textile Indo Rama Synthetics ( India ) Ltd. 59 Capital Goods Ingersoll-Rand ( India ) Ltd. 60 Healthcare Ipca Laboratories Ltd. 61 FMCG ITC Ltd. 62 Metal, Metal Products and Mining J S W Steel Ltd. 63 Metal, Metal Products and Mining Jindal Saw Ltd. 64 Metal, Metal Products and Mining Jindal Steel & Power Ltd. 65 Chemical and Petrochemical Jubilant Organosys Ltd. 66 Healthcare Lupin Ltd. 67 Transport Equipments M.R.F. Ltd. 68 Housing Related Madras Cements Ltd. 69 Transport Equipments Mahindra & Mahindra Ltd. 70 FMCG Marico Ltd. 71 Healthcare Matrix Laboratories Ltd. 72 Diversified Max India Ltd. 73 Healthcare Merck Ltd. 74 Media and Publishing Micro Inks Ltd. 75 Agriculture Monsanto India Ltd. 76 Information Technology Moser Baer India Ltd. 77 FMCG Nestle India Ltd. 78 Healthcare Piramal Healthcare Ltd.37 79 FMCG Nirma Ltd. 80 Healthcare Novartis India Ltd 81 Healthcare Orchid Chemicals Pharmaceuticals Ltd. 82 Healthcare Pfizer Ltd. 83 FMCG Procter & Gamble Hygiene & Health Care Ltd. 84 Transport Equipments Punjab Tractors Ltd. 85 Healthcare Ranbaxy Laboratories Ltd. 86 Textile Raymond Ltd. 87 Power Reliance Infrastructure Ltd.38 88 Oil and Gas Reliance Industries Ltd. 89 Metal, Metal Products and Mining Sesa Goa Ltd. 90 Capital Goods Siemens Ltd. 91 Capital Goods SKF India Ltd. 92 Healthcare Sterling Biotech Ltd. 93 Metal, Metal Products and Mining Sterlite Industries (India) Ltd. Contd..

37 Former Nicholas Piramal India Ltd. 38 Former Reliance Energy Ltd.

Appendix

178

S.No. Sector Company Name 94 Healthcare Sun Pharmaceutical Industries Ltd. 95 Transport Equipments Sundram Fasteners Ltd. 96 Diversified Tata Chemicals Ltd. 97 Transport equipments Tata Motors Ltd. 98 Power Tata Power Co. Ltd. 99 Metal, Metal Products and Mining Tata Steel Ltd. 100 FMCG Tata Tea Ltd. 101 Capital Goods Thermax Ltd. 102 Consumer Durables Titan Industries Ltd. 103 Transport Equipments TVS Motor Company Ltd. 104 Agriculture United Phosphorus Ltd. 105 FMCG United Spirits Ltd. 106 Consumer Durables Videocon Industries Ltd. 107 Diversified Voltas Ltd. 108 Healthcare Wockhardt Ltd. 109 Healthcare Wyeth Ltd.39

INDUSTRY TYPE: SERVICES 110 Diversified Adani Enterprises Ltd.40 111 Capital Goods Alstom Projects Indian Ltd.41 112 Healthcare Apollo Hospitals Enterprise Ltd. 113 Information Technology CMC Limited 114 Tourism EIH Ltd. 115 Transport Equipments Essar Shipping Ports & Logistics Ltd.42 116 Transport Services Great Eastern Shipping Co. Ltd. 117 Information Technology GTL Ltd. 118 Information Technology HCL Technologies Ltd. 119 Finance HDFC 120 Information Technology Hexaware Technologies Ltd. 121 Information Technology Hinduja Ventures Ltd.43 122 Tourism Indian Hotels Co. Ltd. 123 Information Technology Infosys Technologies Ltd. 124 Capital Goods Larsen & Toubro Ltd. 125 Information Technology Mphasis Ltd. 126 Miscellaneous Pantaloon Retail (India) Ltd. 127 Information Technology Polaris Software Lab Ltd 128 Finance Reliance Capital Ltd. 129 Information Technology Rolta India Ltd. 130 Information Technology Satyam Computer Services Ltd. 131 Telecom Tata Communications Ltd.44 132 Telecom Tata Teleservices (Maharashtra) Ltd. 133 Information Technology Wipro Ltd. 134 Media and Publishing Zee Entertainment Enterprises Ltd.

39 Former Wyeth Lederle Ltd. 40 Former Adani Exports Ltd. 41 Former Alstom Power India Ltd. 42 Former Essar Shipping Ltd. 43 Former Hinduja TMT Ltd. 44 Former Videsh Sanchar Nigam Ltd.

Appendix

179

APPENDIX II

Data Structure of Sample Companies (FY 2003-2004 to FY 2005-2006)

S. No. Company Name Sector 1 A B B Ltd. Capital Goods 2 A C C Ltd. Housing Related 3 Abbott India Ltd. Healthcare 4 Adani Enterprises Ltd. 45 Diversified 5 Aditya Birla Nuvo Ltd. Diversified 6 Alok Industries Ltd. Textile 7 Alstom Projects India Ltd. 46 Capital Goods 8 Ambuja Cements Ltd. Housing Related 9 Amtek Auto Ltd. Transport Equipments 10 Apollo Hospitals Enterprise Ltd. Healthcare 11 Apollo Tyres Ltd. Transport Equipments 12 Arvind Ltd. Textile 13 Asahi India Glass Ltd. Transport Equipments 14 Ashok Leyland Ltd. Transport Equipments 15 Asian Paints Ltd. Chemical and Petrochemical 16 Aurobindo Pharma Ltd. Healthcare 17 Aventis Pharma Ltd. Healthcare 18 Bajaj Auto Ltd. Transport Equipments 19 Bajaj Hindustan Ltd. Agriculture 20 Ballarpur Industries Ltd. Miscellaneous 21 Balrampur Chini Mills Ltd. Agriculture 22 Bharat Forge Ltd. Transport Equipments 23 Birla Corporation Ltd. Housing Related 24 Bombay Dyeing & Mfg. Co. Ltd. Textile 25 Bosch Ltd. 47 Capital Goods 26 Britannia Industries Ltd. FMCG 27 C E S C Ltd. Power 28 C M C Ltd. Information Technology 29 Cadila Healthcare Ltd. Healthcare 30 Century Textiles & Industries Ltd.48 Diversified 31 Chambal Fertilisers & Chemicals Ltd. Agriculture 32 Cipla Ltd. Healthcare 33 Crompton Greaves Ltd. Capital Goods 34 Cummins India Ltd. Transport Equipments 35 Dabur India Ltd. FMCG Contd...

45 Former Adani Exports Ltd. 46 Former Alstom Power India Ltd. 47 Former MICO Ltd. 48 Former Century Textiles

Appendix

180

S. No. Company Name Sector 36 Dr. Reddy'S Laboratories Ltd. Healthcare 37 E I H Ltd. Tourism 38 Escorts Ltd. Transport Equipments 39 Essar Oil Ltd. Oil and Gas 40 Essar Shipping Ports & Logistics Ltd. 49 Transport Equipments 41 Essar Steel Ltd. Metal, Metal Products and Mining 42 Essel Propack Ltd. Miscellaneous 43 F D C Ltd. Healthcare 44 Finolex Industries Ltd. Chemical and Petrochemical 45 G T L Ltd. Information Technology 46 Gillette India Ltd. FMCG 47 Glaxosmithkline Consumer Healthcare Ltd. Healthcare 48 Glaxosmithkline Pharmaceuticals Ltd. Healthcare 49 Glenmark Pharmaceuticals Ltd. Healthcare 50 Godrej Consumer Products Ltd. FMCG 51 Grasim Industries Ltd. Diversified 52 Great Eastern Shipping Co. Ltd. Transport Services 53 Gujarat Alkalies & Chemicals Ltd. Chemical and Petrochemical 54 Gujarat Narmada Valley Fertilizers Co. Ltd. Agriculture 55 Gujarat State Fertilizers & Chemicals Ltd. Agriculture 56 H C L Infosystems Ltd. Information Technology 57 H C L Technologies Ltd. Information Technology 58 Hero Honda Motors Ltd. Transport Equipments 59 Hexaware Technologies Ltd. Information Technology 60 Hindalco Industries Ltd. Metal, Metal Products and Mining 61 Hinduja Ventures Ltd. 50 Information Technology 62 Hindustan Unilever Ltd. FMCG 63 Housing Development Finance Corpn. Ltd. Finance 64 I T C Ltd. FMCG 65 India Cements Ltd. Housing Related 66 Indian Hotels Co. Ltd. Tourism 67 Indo Rama Synthetics (India) Ltd. Textile 68 Infosys Technologies Ltd. Information Technology 69 Ipca Laboratories Ltd. Healthcare 70 J S W Steel Ltd. Metal, Metal Products and Mining 71 Jindal Saw Ltd. Metal, Metal Products and Mining 72 Jindal Steel & Power Ltd. Metal, Metal Products and Mining 73 Lupin Ltd. Healthcare 74 M R F Ltd. Transport Equipments 75 Madras Cements Ltd. Housing Related 76 Mahindra & Mahindra Ltd. Transport Equipments Contd...

49 Former Essar Shipping Ltd. 50 Former Hinduja TMT Ltd.

Appendix

181

S. No. Company Name Sector 77 Marico Ltd. FMCG 78 Matrix Laboratories Ltd. Healthcare 79 Max India Ltd. Diversified 80 Monsanto India Ltd. Agriculture 81 Moser Baer India Ltd. Information Technology 82 Nestle India Ltd. FMCG 83 Nirma Ltd. FMCG 84 Orchid Chemicals & Pharmaceuticals Ltd. Healthcare 85 Pantaloon Retail (India) Ltd. Miscellaneous 86 Pfizer Ltd. Healthcare 87 Piramal Healthcare Ltd. 51 Healthcare 88 Polaris Software Lab Ltd. Information Technology 89 Procter & Gamble Hygiene & Health Care

Ltd. FMCG

90 Punjab Tractors Ltd. Transport Equipments 91 Ranbaxy Laboratories Ltd. Healthcare 92 Raymond Ltd. Textile 93 Reliance Industries Ltd. Oil and Gas 94 Reliance Infrastructure Ltd. 52 Power 95 S K F India Ltd. Capital Goods 96 Satyam Computer Services Ltd. Information Technology 97 Sesa Goa Ltd. Metal, Metal Products and Mining 98 Siemens Ltd. Capital Goods 99 Sterlite Industries (India) Ltd. Metal, Metal Products and Mining 100 Sun Pharmaceutical Inds. Ltd. Healthcare 101 Sundram Fasteners Ltd. Transport Equipments 102 T V S Motor Co. Ltd. Transport Equipments 103 Tata Chemicals Ltd. Diversified 104 Tata Motors Ltd. Transport Equipments 105 Tata Power Co. Ltd. Power 106 Tata Steel Ltd. Metal, Metal Products and Mining 107 Tata Tea Ltd. FMCG 108 Tata Teleservices (Maharashtra) Ltd. Telecom 109 Thermax Ltd. Capital Goods 110 Titan Industries Ltd. Consumer Durables 111 United Phosphorus Ltd. Agriculture 112 Videocon Industries Ltd. Consumer Durables 113 Voltas Ltd. Diversified 114 Wipro Ltd. Information Technology 115 Wockhardt Ltd. Healthcare 116 Wyeth Ltd. 53 Healthcare 117 Zee Entertainment Enterprises Ltd. Media and Publishing

51 Former Nicholas Piramal India Ltd. 52 Former Reliance Energy Ltd. 53 Former Wyeth Lederle Ltd.

Appendix

182

APPENDIX III

Clause 35 of the Listing Agreement54 The company agrees to file the following details with the Exchange on a quarterly basis, within 21 days from the end of each quarter, in the format specified as under: (I)(a) Statement showing Shareholding Pattern

Name of the Company:

Scrip Code: Quarter ended:

Total shareholding as a

percentage of total number of shares

Category code

Category of shareholder

Number of shareholders

Total number

of shares

Number of shares held in dematerialized

form As a percentage of (A+B)55

As a percentage of (A+B+C)

(A) Shareholding of Promoter and Promoter Group56

(1) Indian (a) Individuals/ Hindu

Undivided Family

(b) Central Government/ State Government(s)

(c) Bodies Corporate (d) Financial

Institutions/ Banks

(e) Any Other (specify)

Sub-Total (A)(1) (2) Foreign (a) Individuals (Non-

Resident Individuals/ Foreign Individuals)

(b) Bodies Corporate (c) Institutions

54 As amended on March 2007 55 For determining public shareholding for the purpose of Clause 40A. 56 For definitions of ‘Promoter’ and ‘Promoter Group’, refer to Clause 40A.

Appendix

183

Total shareholding as a percentage of total number of shares

Category code

Category of shareholder

Number of shareholders

Total number

of shares

Number of shares held in dematerialized

form As a percentage of (A+B)55

As a percentage of (A+B+C)

(d) Any Other (specify)

Sub-Total (A)(2) Total Shareholding

of Promoter and Promoter Group (A)= (A)(1)+(A)(2)

(B) Public shareholding57

(1) Institutions (a) Mutual Funds/ UTI (b) Financial

Institutions/ Banks

(c) Central Government/ State Government(s)

(d) Venture Capital Funds

(e) Insurance Companies

(f) Foreign Institutional Investors

(g) Foreign Venture Capital Investors

(h) Any Other (specify) Sub-Total (B)(1)

(2) Non-institutions (a) Bodies Corporate (b) Individuals -

i. Individual shareholders holding nominal share capital up to Rs. 1 lakh.

ii. Individual shareholders holding nominal

57 For definitions of ‘Public Shareholding’, refer to Clause 40A.

Appendix

184

Total shareholding as a percentage of total number of shares

Category code

Category of shareholder

Number of shareholders

Total number

of shares

Number of shares held in dematerialized

form As a percentage of (A+B)55

As a percentage of (A+B+C)

share capital in excess of Rs. 1 lakh.

(c) Any Other (specify) Sub-Total (B)(2) Total Public

Shareholding (B)= (B)(1)+(B)(2)

TOTAL (A)+(B) (C) Shares held by

Custodians and against which Depository Receipts have been issued

xxx

GRAND TOTAL (A)+(B)+(C)

xxx

(I)(b) Statement showing Shareholding of persons belonging to the category

“Promoter and Promoter Group”

Sr. No. Name of the shareholder Number of

shares

Shares as a percentage of total number of shares {i.e., Grand Total (A)+(B)+(C)

indicated in Statement at para (I)(a) above}

1. TOTAL

(I)(c) Statement showing Shareholding of persons belonging to the category “Public” and holding more than 1% of the total number of shares

Sr. No. Name of the shareholder Number

of shares

Shares as a percentage of total number of shares {i.e., Grand Total (A)+(B)+(C)

indicated in Statement at para (I)(a) above} 1. 2.

TOTAL

Appendix

185

(I)(d) Statement showing details of locked-in shares

Sr. No. Name of the shareholder

Number of locked-in

shares

Locked-in shares as a percentage of total number of shares {i.e., Grand Total (A)+(B)+(C) indicated

in Statement at para (I)(a) above} 1. 2.

TOTAL (II)(a) Statement showing details of Depository Receipts (DRs)

Sr. No. Type of outstanding

DR (ADRs, GDRs, SDRs, etc.)

Number of outstanding

DRs

Number of shares

underlying outstanding

DRs

Shares underlying outstanding DRs as a percentage of total

number of shares {i.e., Grand Total (A)+(B)+(C) indicated in Statement at para (I)(a) above}

1. 2.

TOTAL

(II)(b) Statement showing Holding of Depository Receipts (DRs), where underlying shares are in excess of 1% of the total number of shares

Sr. No. Name

of the DR

Holder

Type of outstanding DR (ADRs, GDRs,

SDRs, etc.)

Number of shares underlying

outstanding DRs

Shares underlying outstanding DRs as a percentage of total number of

shares {i.e., Grand Total (A)+(B)+(C) indicated in Statement at para (I)(a)

above} 1. 2.

TOTAL

Appendix

186

APPENDIX IV

Clause 40A of the Listing Agreement Minimum level of public shareholding (i) The company agrees to maintain on a continuous basis, public shareholding of at

least 25% of the total number of issued shares of a class or kind, for every such class or kind of its shares which are listed.

(ii) Where the company offers or has in the past offered a particular class or kind of

its shares to the public to the extent of at least 10% of the issue size in terms of Rule 19(2)(b) of the Securities Contracts (Regulations) Rules, 1957, it agrees to maintain on a continuous basis, public shareholding of at least 10% of the total number of issued shares of such class or kind.

(iii) Where the number of outstanding listed shares of any class or kind of the

company are two crore or more and the market capitalization of such company in respect of shares of such class or kind is Rs. 1000 crore or more, it agrees to maintain on a continuous basis, public shareholding of at least 10% of the total number of issued shares of such class or kind.

(iv) Where, as on May 1, 2006, the shares of a particular class or kind issued by the

company are listed and the public shareholding in respect of shares of such class or kind is less than 25% or 10%, as the case may be, of the total number of issued shares of such class or kind, the company agrees to increase public shareholding in respect of shares of such class or kind to 25% or 10%, as the case may be, within such period as may be approved by the Specified Stock Exchange (SSE) but not exceeding two years from the said date. Provided that the SSE may, on an application made by the company and after satisfying itself about the adequacy of steps taken by the company to increase its public shareholding and genuineness of the reasons submitted by the company for not reaching the minimum level of public shareholding and after recording reasons in writing, extend the time for compliance with the requirement of minimum level of public shareholding by a further period not exceeding one year.

(v) Where the public shareholding in a company in respect of shares of such class or kind is less than 25% or 10%, as the case may be, of the total number of issued shares of such class or kind, the company agrees not to dilute in any way its public shareholding, except for supervening extraordinary events, including, but not limited to events specified in sub-clause (vii) of Clause 40A, with the prior approval of the SSE.

(vi) The company agrees not to make any allotment of its shares to its promoters or entities belonging to its promoter group, except on account of supervening

Appendix

187

extraordinary events, including, but not limited to events specified in sub-clause (vii) of Clause 40A, or make any offer to buyback its shares or buy its shares for the purpose of making sponsored issuance of depository receipts or take any other step, including issuance of depository receipts, if it results in reducing the public shareholding below the minimum level of 25% or 10%, as the case may be.

(vii) Where the public shareholding in any class or kind of shares of a company falls

below the minimum level of public shareholding on account of supervening extraordinary events, including, but not limited to - (a) issuance or transfer of shares in compliance with directions of a regulatory

or statutory authority or court or tribunal; (b) issuance or transfer of shares in compliance with the SEBI (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997; (c) re-organization of capital by way of a scheme of arrangement; and (d) issuance or transfer of shares under a restructuring plan approved in

compliance with the Corporate Debt Restructuring System laid down by the Reserve Bank of India,

the SSE may, after examining and satisfying itself about the circumstances of the case and after recording reasons in writing, extend the time for compliance with the requirement of minimum level of public shareholding by a further period not exceeding one year. Provided that the SSE may, on an application made by the company and after satisfying itself about the adequacy of steps taken by the company to increase its public shareholding and genuineness of the reasons submitted by the company for not reaching the minimum level of public shareholding and after recording reasons in writing, extend the time for compliance with the requirement of minimum level of public shareholding by a further period not exceeding one year.

(viii) The company agrees that in the event of sub-clauses (iv) or (vii) becoming applicable, it shall forthwith adopt any of the following methods to raise the public shareholding to the minimum level: (a) issuance of shares to public through prospectus; (b) offer for sale of shares held by promoters to public through prospectus; (c) sale of shares held by promoters through the secondary market; or (d) any other method which does not adversely affect the interest of minority

shareholders.

Provided that for the purpose of adopting methods specified at sub-clauses (c) and (d) above, the company agrees to take prior approval of the SSE which may impose such conditions as it deems fit.

(ix) Where a company fails to comply with this clause, its shares shall be liable to be delisted in terms of the Delisting Guidelines/Regulations, if any, prescribed by SEBI in this regard and the company shall be liable for penal actions under the

Appendix

188

Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.

(x) Nothing contained in sub-clauses (i) to (vii) shall apply to –

(a) a company in respect of which reference is or has been made to the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985 or to the National Company Law Tribunal under Section 424A of the Companies Act, 1956 and such reference is pending or a company in respect of which any rehabilitation scheme is sanctioned by the Board for Industrial and Financial Reconstruction or the National Company Law Tribunal pursuant thereto and is pending full implementation or any appeal is pending regarding such reference or scheme before the Appellate Authority for Industrial and Financial Reconstruction or National Company Law Appellate Tribunal;

(b) a government company as defined under Section 617 of the Companies Act, 1956; or,

(c) an infrastructure company as defined in clause 1.2.1(xv) of the SEBI (Disclosure and Investor Protection) Guidelines, 200058.

Explanation: For the purposes of this clause – 1. The term ‘market capitalization’ shall mean the average market capitalization for

the previous financial year. The average shall be computed as the sum of daily market capitalization over one year, divided by the number of trading days. The market capitalization so arrived at shall be considered for the succeeding four quarters.

2. The term ‘public shareholding’ shall exclude –

(a) shares held by promoters and promoter group; and (b) shares which are held by custodians and against which depository receipts

are issued overseas. 3. The terms ‘promoter’ and ‘promoter group’ shall have the same meaning as is

assigned to them under Explanations I, II and III to sub-clause (m) of clause 6.8.3.2 of the SEBI (Disclosure and Investor Protection) Guidelines, 200059.

58 ‘ Infrastructure Company’ means, a company totally engaged in the business of developing, maintaining and operating infrastructure facility. According to sub-clause (xvi) of clause 1.2.1 ‘infrastructure facility ’ here means the infrastructure facility within the meaning of Section 10(23G)(c) of the Income Tax Act, 1961. 59 Explanation I: For the purpose of sub-clauses (k) and (l) above, the term ‘Promoter’ shall include:

(a) the person or persons who are in over-all control of the company; (b) the person or persons who are instrumental in the formulation of a plan or programme

pursuant to which the securities are offered to the public; (c) the person or persons named in the prospectus as promoters(s).

Provided that a director/ officer of the issuer company or person, if they are acting as such merely in their professional capacity shall not be included in the Explanation.

Appendix

189

Provided that for the purposes of Clause 40A, clause (c) of the said Explanation I shall be read as under:

“the person or persons named in the prospectus as promoter(s) or the person or persons named as promoter(s) in the filings with the stock exchanges, whichever is later.”

4. The terms ‘prospectus’ and ‘Qualified Institutional Buyers’ shall have the same

meaning as is assigned to them under the SEBI (Disclosure and Investor Protection) Guidelines, 200060.

Explanation II: ‘Promoter Group’ shall include:

(a) the promoter; (b) an immediate relative of the promoter (i.e., any spouse of that person, or any parent,

brother, sister or child of the person or of the spouse); and (c) in case promoter is a company:

(i) a subsidiary or holding company of that company; (ii) any company in which the promoter holds 10% or more of the equity capital or

which holds 10% or more of the equity capital of the promoter; (iii) any company in which a group of individuals or companies or combinations

thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company; and

(d) in case the promoter is an individual: (i) any company in which 10% or more of the share capital is held by the promoter or

an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member;

(ii) any company in which a company specified in (i) above, holds 10% or more, of the share capital;

(iii) any HUF or firm in which the aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total; and

(d) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading ‘shareholding of the promoter group’.

Explanation III: The Financial Institution, Scheduled Banks, Foreign Institutional Investors (FIIs) and Mutual Funds shall not be deemed to be a promoter or promoter group merely by virtue of the fact that 10% or more of the equity of the issuer company is held by such institution. Provided that the Financial Institutions, Scheduled Banks and Foreign Institutional Investors (FIIs) shall be treated as promoters or promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them. 60 Qualified Institutional Buyer shall mean: a. Public financial institution as defined in section 4A of the Companies Act, 1956; b. Scheduled commercial banks; c. Mutual funds; d. Foreign institutional investor registered with SEBI; e. Multilateral and bilateral development financial institutions; f. Venture capital funds registered with SEBI; g. Foreign venture capital investors registered with SEBI; and h. State Industrial Development Corporations.

Appendix

190

5. The term ‘Specified Stock Exchange (SSE)’ shall mean - (a) in cases where the company is listed in one stock exchange only, then that

stock exchange; (b) in cases where the company is listed in one or more than one stock

exchange having nation wide trading terminal and / or in one or more stock exchange not having nation wide trading terminal, then all such stock exchanges having nation wide trading terminals; and

(c) in cases where the company is listed in more than one stock exchange and all such stock exchanges do not have nationwide trading terminals, then the stock exchange which was chosen as the Designated Stock Exchange by the company for the previous issue of its shares. Or the regional Stock Exchange, as may be applicable.

Appendix

191

APPENDIX V

Summary of Rotated Factor Loadings on Variables Factors 1 2 3 4 5 IND_PROM -.632 .584 FOR_PROM -.633 PAC -.655 INST -.819 -.422 NON_INST .624 .404 -.619 OWN_CONC .457 B_SIZE -.650 B_COMP .622 AGE .470 .443 SIZE .576 IND .583 .809 LEV GROWTH .746 .561 RISK Eigen values 2.480 2.417 1.991 1.704 1.338 Percentage of variance explained 16.536 16.113 13.276 11.357 8.922 Extraction Method: Principal Component Analysis Rotation Method: Varimax with Kaiser Normalization

Appendix

192

APPENDIX VI

Formulation and Promulgation of Regulations by the SEBI

Regulation(s) Issued on Amendment(s) if any

23 September 2003 20 February 2002 1 August 2006

Securities and Exchange Board of India (Stock Brokers and Sub-brokers) Regulations 1992

23 October 1992

7 September 2006 July 2003 Securities and Exchange Board of India (Prohibition

of Insider Trading) Regulations 1992 19 November 1992

20 February 2002 6 September 2006

I

Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992

22 December 1992 29 May 2007 27 May 2003 22 February 2000 30 September 1999 5 July 2006 7 September 2006

II Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993

7 January 1993

30 November 2006 III Securities and Exchange Board of India (Registrars

to an Issue and Share Transfer Agents) Regulations, 1993

31 May 1993 7 September 2006

10 December 2002 30 September 1999

IV Securities and Exchange Board of India (Underwriters) Regulations 1993

8 October 1993

7 September 2006 4 July 2003 17 February 2000

V The Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993

29 December 1993

7 September 2006 VI The Securities and Exchange Board of India

(Bankers to an Issue) Regulations, 1994 14 July 1994 7 September 2006

19 February 2004 27 January 2004 13 February 2001 21 August 2006 8 January 2007

VII The Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995

14 November 1995

31 December 2007 VIII The Securities and Exchange Board of India

(Custodian of Securities) Regulations, 1996 16 May 1996

10 June 2004 2 September 2003

IX The Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996

16 May 1996

10 October 2007 5 April 2005 X The Securities and Exchange Board of India

(Venture Capital Funds) Regulations, 1996 4 December 1996

7 September 2006 12 January 2004 11 June 2002 19 February 2002 3 August 2006 29 May 2007

XI The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996

9 December 1996

31 October 2007

Appendix

193

Regulation(s) Issued on Amendment(s) if any

30 December 2004 XII The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

20 February 1997 30 August 2004

9 September 2002 29 January 2002 21 August 2006

29 May 2007 18 June 2004 21 August 2006

XIII The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998

11 November 1998

29 May 2007 7 July 1999 1 October 2003

25 March 2003 XIV The Securities and Exchange Board of India (Credit

Rating Agencies) Regulations, 1999 7 September 2006

XV The Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999

15 October 1999 17 January 2002

5 April 2004 XVI The Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations, 2000

15 September 2000 6 September 2006

XVII The Securities and Exchange Board of India (Issue of Sweat Equity) Regulations, 2002

24 September 2002

6 June 2005 3 December 2004 2 September 2004 13 July 2004 30 December 2003 27 November 2003

XVIII The Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002

27 September 2002

23 August 2006 XIX The Securities and Exchange Board of India

(Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003

17 July 2003 17 July 2003

XX The Securities and Exchange Board of India (Ombudsman) Regulations, 2003

21 August 2003 9 November 2006

XXI The Securities and Exchange Board of India (Central Listing Authority) Regulations, 2003

21 August 2003 30 December 2004

31 March 2005 28 September 2004 17 August 2004 30 July 2004 5April 2004 9 December 2003 25 November 2003

XXII The Securities and Exchange Board of India (Central Database of Market Participants) Regulations, 2003

20 November 2003

20 November 2003 XIII The Securities and Exchange Board of India (Self

Regulatory Organizations) Regulations, 2004 19 February 2004

XXIV Securities And Exchange Board of India (Criteria For Fit And Proper Person) Regulations, 2004

10 March 2004

Appendix

194

Regulation(s) Issued on Amendment(s) if any

XXV SEBI (Interest Liability Regularisation) Scheme, 2004

15 July 2004

XXVI Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006

13 November 2006

XXVII Securities And Exchange Board Of India (Regulatory Fee on Stock Exchanges) Regulations, 2006

14 December 2006

XXVIII Securities and Exchange Board of India (Certification Of Associated Persons in the Securities Markets) Regulations, 2007

17 October 2007

Source: http://www.sebi.org.in

Appendix

195

APPENDIX VII

Clause 49 of the Listing Agreement

The company agrees to comply with the following provisions: I. Board of Directors (A) Composition of Board (i) The Board of directors of the company shall have an optimum combination of

executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors.

(ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.

(iii) For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non-executive director of the company who:

a. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;

b. is not related to promoters or persons occupying management positions at the board level or at one level below the board;

c. has not been an executive of the company in the immediately preceding three financial years;

d. is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following:

i. the statutory audit firm or the internal audit firm that is associated with the company, and

ii. the legal firm(s) and consulting firm(s) that have a material association with the company.

e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; and

f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.

Explanation: For the purposes of the sub-clause (iii):

a. Associate shall mean a company which is an “associate” as defined in Accounting Standard (AS) 23, “Accounting for Investments in Associates in Consolidated Financial Statements”, issued by the Institute of Chartered Accountants of India.

b. “Senior management” shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.

Appendix

196

c. “Relative” shall mean “relative” as defined in section 2(41) and section 6 read with Schedule IA of the Companies Act, 1956.

(iv) Nominee directors appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors.

Explanation: “Institution” for this purpose means a public financial institution as defined in Section 4A of the Companies Act, 1956 or a “corresponding new bank” as defined in section 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 [both Acts].” (B) Non executive directors’ compensation and disclosures All fees/compensation, if any paid to non-executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting. The shareholders’ resolution shall specify the limits for the maximum number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate. (C) Other provisions as to Board and Committees (i) The board shall meet at least four times a year, with a maximum time gap of three

months between any two meetings. The minimum information to be made available to the board is given in Annexure– I A.

(ii) A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

Explanation: 1. For the purpose of considering the limit of the committees on which a director

can serve, all public limited companies, whether listed or not, shall be included and all other companies including private limited companies, foreign companies and companies under Section 25 of the Companies Act shall be excluded.

2. For the purpose of reckoning the limit under this sub-clause, Chairmanship/membership of the Audit Committee and the Shareholders’ Grievance Committee alone shall be considered.

3. The Board shall periodically review compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non-compliances.

(D) Code of Conduct (i) The Board shall lay down a code of conduct for all Board members and senior

management of the company. The code of conduct shall be posted on the website of the company.

(ii) All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO.

Appendix

197

Explanation: For this purpose, the term “senior management” shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads. II Audit Committee (A) Qualified and Independent Audit Committee A qualified and independent audit committee shall be set up, giving the terms of reference subject to the following: (i) The audit committee shall have minimum three directors as members. Two-thirds

of the members of audit committee shall be independent directors. (ii) All members of audit committee shall be financially literate and at least one

member shall have accounting or related financial management expertise. Explanation 1: The term “financially literate” means the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows. Explanation 2: A member will be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. (iii) The Chairman of the Audit Committee shall be an independent director; (iv) The Chairman of the Audit Committee shall be present at Annual General

Meeting to answer shareholder queries; (v) The audit committee may invite such of the executives, as it considers appropriate

(and particularly the head of the finance function) to be present at the meetings of the committee, but on occasions it may also meet without the presence of any executives of the company. The finance director, head of internal audit and a representative of the statutory auditor may be present as invitees for the meetings of the audit committee;

(vi) The Company Secretary shall act as the secretary to the committee. (B) Meeting of Audit Committee The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present. (C) Powers of Audit Committee The audit committee shall have powers, which should include the following:

1. To investigate any activity within its terms of reference. 2. To seek information from any employee. 3. To obtain outside legal or other professional advice.

Appendix

198

4. To secure attendance of outsiders with relevant expertise, if it considers necessary.

(D) Role of Audit Committee The role of the audit committee shall include the following:

1. Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

2. Recommending to the Board, the appointment, re-appointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees.

3. Approval of payment to statutory auditors for any other services rendered by the statutory auditors.

4. Reviewing, with the management, the annual financial statements before submission to the board for approval, with particular reference to:

a. Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (2AA) of section 217 of the Companies Act, 1956

b. Changes, if any, in accounting policies and practices and reasons for the same

c. Major accounting entries involving estimates based on the exercise of judgment by management

d. Significant adjustments made in the financial statements arising out of audit findings

e. Compliance with listing and other legal requirements relating to financial statements

f. Disclosure of any related party transactions g. Qualifications in the draft audit report.

5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval

6. Reviewing, with the management, performance of statutory and internal auditors, adequacy of the internal control systems.

7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit.

8. Discussion with internal auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into

matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board.

10. Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.

11. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders (in case of non payment of declared dividends) and creditors.

12. To review the functioning of the Whistle Blower mechanism, in case the same is existing.

Appendix

199

13. Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

Explanation (i): The term “related party transactions” shall have the same meaning as contained in the Accounting Standard 18, Related Party Transactions, issued by The Institute of Chartered Accountants of India. Explanation (ii): If the company has set up an audit committee pursuant to provision of the Companies Act, the said audit committee shall have such additional functions/features as is contained in this clause.

(E) Review of information by Audit Committee The Audit Committee shall mandatorily review the following information:

1. Management discussion and analysis of financial condition and results of operations;

2. Statement of significant related party transactions (as defined by the audit committee), submitted by management;

3. Management letters / letters of internal control weaknesses issued by the statutory auditors;

4. Internal audit reports relating to internal control weaknesses; and 5. The appointment, removal and terms of remuneration of the Chief internal auditor

shall be subject to review by the Audit Committee III. Subsidiary Companies (i) At least one independent director on the Board of Directors of the holding

company shall be a director on the Board of Directors of a material non listed Indian subsidiary company.

(ii) The Audit Committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company.

(iii) The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.

Explanation 1: The term “material non-listed Indian subsidiary” shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year. Explanation 2: The term “significant transaction or arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for the immediately preceding accounting year. Explanation 3: Where a listed holding company has a listed subsidiary which is itself a holding company, the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are concerned.

Appendix

200

IV. Disclosures (A) Basis of related party transactions

(i) A statement in summary form of transactions with related parties in the ordinary course of business shall be placed periodically before the audit committee.

(ii) Details of material individual transactions with related parties which are not in the normal course of business shall be placed before the audit committee.

(iii) Details of material individual transactions with related parties or others, which are not on an arm’s length basis should be placed before the audit committee, together with Management’s justification for the same.

(B) Disclosure of Accounting Treatment Where in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view of the underlying business transaction in the Corporate Governance Report. (C) Board Disclosures – Risk management The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures. These procedures shall be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. (D) Proceeds from public issues, rights issues, preferential issues etc. When money is raised through an issue (public issues, rights issues, preferential issues etc.), it shall disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc), on a quarterly basis as a part of their quarterly declaration of financial results. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice and place it before the audit committee. Such disclosure shall be made only till such time that the full money raised through the issue has been fully spent. This statement shall be certified by the statutory auditors of the company. The audit committee shall make appropriate recommendations to the Board to take up steps in this matter. (E) Remuneration of Directors (i) All pecuniary relationship or transactions of the non-executive directors vis-à-vis

the company shall be disclosed in the Annual Report. (ii) Further the following disclosures on the remuneration of directors shall be made in

the section on the corporate governance of the Annual Report: (a) All elements of remuneration package of individual directors summarized under

major groups, such as salary, benefits, bonuses, stock options, pension etc. (b) Details of fixed component and performance linked incentives, along with the

performance criteria. (c) Service contracts, notice period, severance fees.

Appendix

201

(d) Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable.

(iii) The company shall publish its criteria of making payments to non-executive directors in its annual report. Alternatively, this may be put up on the company’s website and reference drawn thereto in the annual report.

(iv) The company shall disclose the number of shares and convertible instruments held by non-executive directors in the annual report.

(v) Non-executive directors shall be required to disclose their shareholding (both own or held by / for other persons on a beneficial basis) in the listed company in which they are proposed to be appointed as directors, prior to their appointment. These details should be disclosed in the notice to the general meeting called for appointment of such director

(F) Management (i) As part of the directors’ report or as an addition thereto, a Management Discussion

and Analysis report should form part of the Annual Report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the company’s competitive position:

i. Industry structure and developments. ii. Opportunities and Threats. iii. Segment–wise or product-wise performance. iv. Outlook v. Risks and concerns. vi. Internal control systems and their adequacy. vii. Discussion on financial performance with respect to operational

performance. viii. Material developments in Human Resources / Industrial Relations front,

including number of people employed. (ii) Senior management shall make disclosures to the board relating to all material

financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.)

Explanation: For this purpose, the term ‘senior management’ shall mean personnel of the company who are members of its core management team excluding the Board of Directors). This would also include all members of management one level below the executive directors including all functional heads. (G) Shareholders (i) In case of the appointment of a new director or re-appointment of a director the

shareholders must be provided with the following information: (b) A brief resume of the director; (c) Nature of his expertise in specific functional areas; (d) Names of companies in which the person also holds the directorship and

the membership of Committees of the Board; and

Appendix

202

(e) Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v) above

(ii) Quarterly results and presentations made by the company to analysts shall be put on company’s web-site, or shall be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site.

(iii) A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee shall be designated as ‘Shareholders/Investors Grievance Committee’.

(iv) To expedite the process of share transfers, the Board of the company shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight.

V. CEO/CFO certification The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that:

(a) They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief :

(i) these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;

(ii) these statements together present a true and fair view of the company’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

(b) There are, to the best of their knowledge and belief, no transactions entered into by the company during the year which are fraudulent, illegal or violative of the company’s code of conduct.

(c) They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

(d) They have indicated to the auditors and the Audit committee (i) significant changes in internal control during the year; (ii) significant changes in accounting policies during the year and that the

same have been disclosed in the notes to the financial statements; and (iii) instances of significant fraud of which they have become aware and

the involvement therein, if any, of the management or an employee having a significant role in the company’s internal control system

VI. Report on Corporate Governance (i) There shall be a separate section on Corporate Governance in the Annual Reports

of company, with a detailed compliance report on Corporate Governance. Non-

Appendix

203

compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the non-mandatory requirements have been adopted should be specifically highlighted. The suggested list of items to be included in this report is given in Annexure- I C and list of non-mandatory requirements is given in Annexure – I D.

(ii) The companies shall submit a quarterly compliance report to the stock exchanges within 15 days from the close of quarter as per the format given in Annexure I B. The report shall be signed either by the Compliance Officer or the Chief Executive Officer of the company

VII. Compliance (1) The company shall obtain a certificate from either the auditors or practicing

company secretaries regarding compliance of conditions of corporate governance as stipulated in this clause and annex the certificate with the directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall also be sent to the Stock Exchanges along with the annual report filed by the company.

(2) The non-mandatory requirements given in Annexure – I D may be implemented as per the discretion of the company. However, the disclosures of the compliance with mandatory requirements and adoption (and compliance) / non-adoption of the non-mandatory requirements shall be made in the section on corporate governance of the Annual Report.

Annexure I A Information to be placed before Board of Directors 1. Annual operating plans and budgets and any updates. 2. Capital budgets and any updates. 3. Quarterly results for the company and its operating divisions or business

segments. 4. Minutes of meetings of audit committee and other committees of the board. 5. The information on recruitment and remuneration of senior officers just below the

board level, including appointment or removal of Chief Financial Officer and the Company Secretary.

6. Show cause, demand, prosecution notices and penalty notices which are materially important.

7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.

8. Any material default in financial obligations to and by the company, or substantial nonpayment for goods sold by the company.

9. Any issue, which involves possible public or product liability claims of substantial nature, including any judgement or order which, may have passed strictures on the conduct of the company or taken an adverse view regarding another enterprise that can have negative implications on the company.

10. Details of any joint venture or collaboration agreement.

Appendix

204

11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.

12. Significant labour problems and their proposed solutions. Any significant development in Human Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary Retirement Scheme etc.

13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business.

14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of adverse exchange rate movement, if material.

15. Non-compliance of any regulatory, statutory or listing requirements and shareholders service such as non-payment of dividend, delay in share transfer etc.

Annexure I B Format of Quarterly Compliance Report on Corporate Governance Name of the Company: Quarter ending on:

Appendix

205

Note: 1) The details under each head shall be provided to incorporate all the information

required as per the provisions of the Clause 49 of the Listing Agreement. 2) In the column No.3, compliance or non-compliance may be indicated by

Yes/No/N.A. For example, if the Board has been composed in accordance with the Clause 49 I of the Listing Agreement, “Yes” may be indicated. Similarly, in case the company has no related party transactions, the words “N.A.” may be indicated against 49 (IV A).

3) In the remarks column, reasons for non-compliance may be indicated, for example, in case of requirement related to circulation of information to the shareholders, which would be done only in the AGM/EGM, it might be indicated in the “Remarks” column as – “will be complied with at the AGM”. Similarly, in respect of matters which can be complied with only where the situation arises, for example, ‘Report on Corporate Governance’ is to be a part of Annual Report only, the words ‘will be complied in the next Annual Report’ may be indicated.

Annexure I C Suggested List of Items to Be Included In the Report on Corporate Governance in the Annual Report of Companies

1. A brief statement on company’s philosophy on code of governance.

2. Board of Directors: i. Composition and category of directors, for example, promoter,

executive, non-executive, ii. independent non-executive, nominee director, which institution

represented iii. as lender or as equity investor. iv. Attendance of each director at the Board meetings and the last AGM. v. Number of other Boards or Board Committees in which he/she is a

member or Chairperson vi. Number of Board meetings held, dates on which held.

3. Audit Committee:

i. Brief description of terms of reference ii. Composition, name of members and Chairperson iii. Meetings and attendance during the year

4. Remuneration Committee: i. Brief description of terms of reference ii. Composition, name of members and Chairperson iii. Attendance during the year iv. Remuneration policy v. Details of remuneration to all the directors, as per format in main

report.

Appendix

206

5. Shareholders Committee: i. Name of non-executive director heading the committee ii. Name and designation of compliance officer iii. Number of shareholders’ complaints received so far iv. Number not solved to the satisfaction of shareholders v. Number of pending complaints

6. General Body meetings:

i. Location and time, where last three AGMs held. ii. Whether any special resolutions passed in the previous 3 AGMs iii. Whether any special resolution passed last year through postal ballot –

details of voting pattern iv. Person who conducted the postal ballot exercise v. Whether any special resolution is proposed to be conducted through

postal ballot vi. Procedure for postal ballot

7. Disclosures:

i. Disclosures on materially significant related party transactions that may have potential conflict with the interests of company at large.

ii. Details of non-compliance by the company, penalties, strictures imposed on the company by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last three years.

iii. Whistle Blower policy and affirmation that no personnel has been denied access to the audit committee.

iv. Details of compliance with mandatory requirements and adoption of the nonmandatory requirements of this clause

8. Means of communication.

i. Quarterly results ii. Newspapers wherein results normally published iii. Any website, where displayed iv. Whether it also displays official news releases; and v. The presentations made to institutional investors or to the analysts.

9. General Shareholder information:

i. AGM : Date, time and venue ii. Financial year iii. Date of Book closure iv. Dividend Payment Date v. Listing on Stock Exchanges vi. Stock Code vii. Market Price Data : High., Low during each month in last financial

year

Appendix

207

viii. Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc.

ix. Registrar and Transfer Agents x. Share Transfer System xi. Distribution of shareholding xii. Dematerialization of shares and liquidity xiii. Outstanding GDRs/ADRs/Warrants or any Convertible instruments,

conversion date and likely impact on equity xiv. Plant Locations xv. Address for correspondence

Annexure I D Non-Mandatory Requirements (1) The Board

1. A non-executive Chairman may be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties. Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company.

(2) Remuneration Committee

i. The board may set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment.

ii. To avoid conflicts of interest, the remuneration committee, which would determine the remuneration packages of the executive directors may comprise of at least three directors, all of whom should be non-executive directors, the Chairman of committee being an independent director.

iii. All the members of the remuneration committee could be present at the meeting. iv. The Chairman of the remuneration committee could be present at the Annual

General Meeting, to answer the shareholder queries. However, it would be up to the Chairman to decide who should answer the queries.

(3) Shareholder Rights

A half-yearly declaration of financial performance including summary of the significant events in last six-months, may be sent to each household of shareholders.

(4) Audit qualifications Company may move towards a regime of unqualified financial statements.

(5) Training of Board Members A company may train its Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them.

Appendix

208

(6) Mechanism for evaluating non-executive Board Members

The performance evaluation of non-executive directors could be done by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer Group evaluation could be the mechanism to determine whether to extend/continue the terms of appointment of non-executive directors.

(7) Whistle Blower Policy The company may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for direct access to the Chairman of the Audit committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization.

Appendix

209

APPENDIX VIII

Indian Accounting Standards

AS 1 Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after the Balance Sheet Date AS 5 Net Profit or Loss for the Prior Period Items and Changes in Accounting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts AS 8 Accounting for Research and Development AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11 The Effects of Changes in Foreign Exchange Rates AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 Employee Benefits AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share AS 21 Consolidated Financial Statements AS 22 Accounting for Taxes on Income. AS 23 Accounting for Investments in Associates in Consolidated Financial Statements AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent Liabilities and Contingent Assets AS 30 Financial Instruments: Recognition and Measurement AS 31 Financial Instruments: Presentation AS 32 Financial Instruments: Disclosures Source: ICAI