Good corporate governance has assumed great importance and urgency in India due to the following reasons :
- Changing Ownership Structure : The profile of corporate ownership has changed significantly. Public financial institutions are the single largest shareholder in most of the large corporations in the private sector. Institutional shareholders have reversed the trend of scattered shareholders. Institutional investors (foreign as well as Indian) and mutual funds have now become singly or jointly direct challenges to managements of companies. Due to threat of hostile takeover bids and the growth of institutional investors the big business houses started talking about corporate governance.
- Unlike the west large companies in India have a complex ownership pattern involving promoters, financial institutions, banks, insurance companies, mutual funds, foreign institutional investors and small private investors. Therefore, copying in to the corporate governance practices of the west will not be appropriate in US.
- Social Responsibility : A company is a legal entity without physical existence. Therefore, it is managed by board of directors which is accountable and responsible interests of customers, lenders, suppliers and the local community of enhancing shareholders’ value. An effective system of corporate governance provides a mechanism for regulating the duties of directors so that they act in the best interests of the companies. Control systems are established either through law or self-regulations.
- Scams : In recent years several corporate frauds have shaken the public confidence. Harshad Mehta scandal, CRB Capital case and other frauds have caused tremendous loss to the small investor. More than 60% of the listed companies are not operating. A large number of companies have been transferred to Z group by the Bombay Stock Exchange.
- Corporate Oligarchy : Shareholder activism and shareholder democracy continue to remain myths in India. Postal Ballot System is still absent. Proxies are not allowed to speak at the meetings. Shareholders, associations, investors, education and awareness have not emerged as a countervailing force.