Monday, June 14, 2010

Bits of Interest

1. Mutual Funds and Unit Premium

The Law-In-Perspective Blog uses the analogy of Ponzi schemes to explain a March 2010 circular of SEBI that prohibits mutual funds from using the unit premium reserve to pay dividends. If one would prefer to avoid the negative connotation associated with a Ponzi scheme, the post also looks at another parallel, being the restrictions under the Companies Act, 1956 on return of premium on shares of a company through payment of dividend.

2. Indianizing Corporate Governance

In a Business Standard column, Pratip Kar calls for the localization of corporate governance norms. He argues:

The conceptual underpinnings of corporate governance, in their present form, are rooted in the western culture and thought or in the western “dharma” (in the wider sense of the word); and in the rational jurisprudence of the Roman law and the western law. Hence they lend themselves to an easy adaptation by the English-speaking peoples. They are a product of European liberalism. They have evolved through the debates on the beneficiaries of a governance process between the Magna Carta and the American War of Independence. Board activism and empowerment, at the heart of which is the demand to strengthen the board, also have their origins in the English-speaking countries such as Australia, Canada, the United Kingdom and the United States. However, those countries whose economic and political traditions, and institutions and ownership structures, are different from the English-speaking countries, find these concepts distant as well as foreign; or in a sense “not invented here”; and not easy to accept.

In India, the way corporate governance came to be formally adopted by firms especially after 2000 reflects the natural dominance of the contemporary western culture and thought over Indian perceptions and readings. It has not often been realised that the principles of corporate governance have always been an integral part of Indian culture and society. This has its advantages as well as weaknesses.

Advantages arise from the fact that in an era of globalisation, when the Indian economy is seeking to integrate itself with the global economy, and when there is a concerted move towards harmonisation of global regulatory standards and accounting principles, it is only pragmatic that the corporate governance architecture should be built on globally-recognisable design, and the standards scripted in globally-understood alphabets. For this reason, long before the two words became a business reality in India, the principles of corporate governance came to be easily adopted by those companies and people behind them, who had by education or by business came in closer touch with the western world.

The weakness is that, unless the founding principles of business are rooted in the dharma and culture of a country, their easy and wider acceptability and adaptability become elusive, if not difficult. It is important for us to find our own idiom for true governance, one that is rooted in the Indian ethos, but speaks the global language.
This is a path on which some of us on this Blog have tread in examining corporate governance in India. A more general analysis on transplant of corporate governance norms in India is available here, while a specific analysis on independent directors is available here.

3. A Holding Company for PSEs

A Financial Express column proposes the idea of setting up a holding company for public sector enterprises (PSEs) in India. While this idea is worth exploring further, its results will be effective only if the holding company itself is immune from the several issues such as excessive governmental interference currently plaguing PSEs.

The holding company model is not without other examples. China has gone down the path of consolidating the holdings of its state owned enterprises under the State-owned Assets Supervision and Administration Commission (or SASAC) and it would be useful to draw from results of the Chinese experience as well.

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