This post comes to us from N. Balasubramanian, Professor of Finance at the Indian Institute of Management, Bangalore; Bernard S. Black, Professor of Finance and Law at Northwestern University and Professor of Finance and Law at the University of Texas at Austin; and Vikramaditya Khanna, Professor of Law at the University of Michigan.
In our paper, The Relation between Firm-level Corporate Governance and Market Value: A Study of India, which was recently made publicly available on SSRN, we provide a detailed overview of the practices of publicly traded firms in India, and identify areas where governance practices are relatively strong or weak, relative to developed countries. We also examine whether there is a cross-sectional relationship between measures of governance and measures of firm performance.
We find that most firms meet the board independence rules under Indian law, which require either 50% outside directors or 1/3 outside directors and a separate CEO and board chairman, but 13% (38 firms) do not. The board chairman often represents the controlling business group or other controlling shareholder. Firms are more likely to comply with audit committee requirement, although 1% do not. Related party transactions are common (67% of firms have RPTs representing 1% of more of revenues), but approval requirements for them are often weak. For transactions with a controlling shareholder, only 7% (1%) of firms require approval by non-conflicted directors (minority shareholders). However, 78% of firms nominally require RPTs to be on “arms-length” terms, and 94% disclose them to shareholders. Only about 2/3rds of firms provide annual reports on their websites. For those which do not, there is no good alternate source. Executive compensation is modest by US standards, but CEOs face only a small risk of dismissal. Only about 75% of firms allow voting by mail, even though this has been legally required since 1956. Government enforcement actions against firms are almost nonexistent.