Monday, September 21, 2009

Contestability of Corporate Control

In a column in the Business Standard, Nitin Desai argues that the current ecosystem in India provides greater benefits to corporate control, resulting in a number of large Indian companies being managed by the promoter-owners.

Corporate control may be susceptible to challenge if there is a market for control facilitated by a liberal takeover regime. However, as we have seen (here and here), the large scale promoter shareholdings in the Indian context act as a dampener to hostile takeovers and a market for corporate control. Apart from that, corporate control may be reined in through appropriate mechanisms of corporate governance. But, as Desai notes, our “model of oversight relies heavily on independent directors and auditors” which work well only where ownership and management are separated (in countries with diffused shareholding). As I have argued (in the same vein) in this paper, the current regime on corporate governance has been transplanted from jurisdictions which display diffused shareholding and hence is inappropriate to the Indian regime which is dominated by promoter-controlled companies. What is necessary is a paradigm shift in measures to address governance problems pertaining to controlled companies. This requires the empowerment of minority shareholders who are conferred a more participative role in corporate affairs. As Desai concludes, the agenda needs to move “Indian capitalism out of its feudal phase into a more democratic environment of effective shareholder control”.

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