Sunday, July 31, 2016

The State in Business and the Business of Regulation

[The following post is contributed by Bhargavi Zaveri, who is with the National Institute of Public Finance and Policy, New Delhi. She can be contacted at bhargavi.zaveri@nipfp.org.in.]

The public shareholders of a listed public sector bank were reportedly denied e-voting facilities at an extra-ordinary general meeting held in January 2016. In 2008, a state assembly passed a law unilaterally amending the terms of bonds issued to the public by a public sector undertaking (PSU). PSUs are exempt from several corporate governance-related requirements under the Companies Act, 2013 and its predecessor law (see here and here on this blog for a list of these exemptions). These are examples of the age-old conflict between the State's role as the lawmaker and as the owner of businesses. The State, by being uniquely placed to influence the outcome of a law, is in a position to unduly favour itself as a business participant at the cost of its competitors and counterparties.

The political economy for amending the law to subject state-owned corporations to
higher regulatory standards is absent in India. What else can be done to mitigate this conflict? In an article in the Economic and Political Weekly, I use the concept of regulatory dualism (or the practice of creating voluntary platforms with higher standards) to overcome the political economy problem of making reforms that are resisted by incumbents. Using examples of other countries where established firms resisted reform to corporate governance, I argue that a platform for voluntary compliance creates a 'race to the top' effect for firms to match higher standards. In practice, this means, that if some PSUs voluntarily opt out of the exemptions granted to them, others will follow suit.


- Bhargavi Zaveri

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