Reform Indian Corporate Governance Practices

Shubi Arora begins a three part report on the Asian Corporate Governance Association (ACGA) White Paper on Corporate Governance in India. The need for improvement in Indian Corporate Governance Practices: Part I, 4/12/2010.

It concluded that while India has enacted numerous reforms in corporate governance, especially in the area of company boards, independent directors, and disclosure and accounting standards, certain critical areas, such as shareholder meeting and voting procedures, regulation of affiliate transactions, issuance of preferential warrants, and quality of corporate disclosures, are in need of further improvement.

Many Indian businesses family-based, hesitating to relinquish control.  Second, punitive tax rates encouraged widespread tax evasion and other practices that have taken years to reform and even longer to change culturally.  Additional regulatory reforms are needed to address shareowner meeting and voting procedures.

First, detailed agendas for shareholder meetings are often not easily available.  Many companies neither upload these documents to the websites of the two main Indian stock exchanges (the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE)), nor do they make them clearly available on their own websites.  Second, votes are customarily counted in India by a “show of hands” rather than by a “poll.”  This former method effectively gives each shareholder an equal voice regardless of the number of shares it owns.  But the inequity does not stop there.  Under Indian law, proxies are not allowed to speak at meetings or vote on a show of hands.  Even though they can vote on a poll, since voting by a show of hands is the norm, the proxy votes of shareholders who cannot attend meetings are seldom counted.  Third, the lack of voting by poll also means a lack of detailed information on the results of meetings.  Even if polls are called, the results are not always published on the company’s website because there is no legal requirement to do so.

These practices remind me of those in the US that existed widely in the mid nineteenth century when one shareowner, one vote often prevailed. While one-vote-per-share rules creates a democracy of shares, common law used to involve a democracy of shareowners, much like current practices in India involving votes by a “show of hands.”

Before adopting ACGA recommendations, India may want to take a closer look at practices among the Eurofirst 300 index. Some 20% of those companies have oligarchic voting rules that give more voting rights to a small group of shareowners, often family members. On the other side of the equation, 15% provide for voting rights ceilings, ranging from 2% to 30% of votes, which serves to disperse power among shareowners. See Social Conceptions of the Corporation: Insights from the History of Shareholder Voting Rights by Colleen A. Dunlavy.