CORPORATE GOVERNANCE AND THE ROLE OF INSITUTIONAL INVESTORS

CORPORATE GOVERNANCE AND THE ROLE OF INSITUTIONAL INVESTORS

CORPORATE GOVERNANCE IN INDIA

In the 1990’s there was huge wave of liberalization sweeping up in the Indian Market which led to Corporate Governance gaining importance. In the early 2000’s, corporate governance became an obligation through the introduction of Listing Agreement Clause 49. But in 2009, the Ministry of Corporate Affairs enforced some voluntary corporate governance guidelines which deviated from the earlier stand which was taken through Clause 49 by going back to a voluntary approach from an obligatory approach. But the key rules regarding corporate governance have been amalgamated into the Companies Act,2013. This led to the corporate governance framework in India to again shift from a voluntary to an obligatory approach and it remains obligatory still. Corporate Governance in India hovers around one main issue of dominant shareholders. It focuses more on protecting the minority shareholder rights and keeping the dominant shareholders under control.

INSTITUTIONAL INVESTORS

Institutional Investors are a major cog in influencing efficient corporate governance because they are shareholders with a robust shareholding. The policies introduced by the Indian Government in the recent years has seen a rise in Foreign Direct Investment and Investments by Foreign Institutes in India. With time, institutional investors are evolving into an essential part of a company and activism regarding institutional investors is gaining prevalence in India. In various countries, institutional investors take an active part in corporate governance of companies. Major institutional investors have the authority of conveying the information to the shareholders which they have obtained from the management. They oversee the Board decisions and play an active part in the formation of efficient practices of corporate governance in a firm.

There are a few different types of institutional investors which are banks, provident funds, development financial institutions, foreign institutional investors, insurance companies, proposed private fund managers and mutual funds and some of these are not regulated in India. Foreign Institutional Investors, for example, are not regulated because they are based outside India and have foreign investors or Non- Resident Indian investors.[1] ?

A major part of the shareholders sell the shares they own instead of taking an active part in company management. This causes a decline in the prices of the company’s stock which in turn affects the market. Also, smaller shareholders do not have incentive to take part in company management and is also cost ineffective for them. Institutional Investors can be divided into two groups which is pressure sensitive and pressure insensitive. The former are the ones who abide by the majority opinion and the latter are those who raise dissent and give their own opinions instead of simply voting in the majority’s favour.?

It can be said that an effective corporate governance is a function of large shareholding and effective legal protection. The public funds are allocated to the institutional investors which gives these investors access to a major chunk of the household income. These investors act as a safety deposit of the people’s money and act in a fiduciary capacity which gives them the obligation to make decisions in the best interests of the company and also to guide the company for it to function ethically.

ROLE OF INSTITUTIONAL INVESTORS IN CORPORATE GOVERNANCE IN INDIA

India has seen a considerable rise in the number of Institutional Investors in the recent years because the policies adopted by the Indian Government are investor centric and help in increasing Foreign Institutional Investment and Foreign Direct Investment in the country.

The practice of participation by institutional investors is not abundantly prevalent in India. The investors hardly use their voting rights in a meaningful manner because after evaluation, they find out that the costs attached with the exercising of the voting rights is too high when compared to the advantages attached to it. This results in institutional investors not taking an active part and remaining passive. In a majority of Indian companies, the institutional investors who were likely to play the monitoring role are missing or are hardly noticeable and when it comes to smaller companies, they are completely invisible.

The corporate governance framework in India is determined by the Organization for Economic Co-operation and Development (OECD) principles. These principles are not mandatory and gives the governments discretion to adopt these principles. Clause 49 of the listing agreement and regulations issued by SEBI and Ministry of Company Affairs govern corporate governance of companies in India. OECD principles enunciates the shareholders’ rights and key ownership functions. The principle states that the rights of the shareholders should be facilitated and protected. But the problem is that the rights of the shareholders exist only on paper and are not exercised much. Companies Act and the SEBI Regulations provide various provisions to protect shareholder rights, but still many cases of malpractice have been filed by investors.

One other OECD principle which protects shareholder’s rights is equal treatment of shareholders. This principle states that shareholders should not be treated in such a manner which would cause prejudice to other classes of shareholders. When it comes to voting for decisions, Foreign Institutional Investors have an equal right. The institutional investors do not play an active role in India which does not help in the improvement of the standards of corporate governance. It is the duty of these institutional investors to demand more accountability and greater transparency from the Indian companies because most of them are family run. They also need to play a more active role because only then it would positively affect the corporate governance rating which will help in bettering the corporate governance standards in India.

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SUGGESTIONS FOR BETTER CORPORATE GOVERNANCE PRACTICES INVOLVING INSTITUTIONAL INVESTOR ACTIVISM

It can be said that institutional investors are inevitable for efficient corporate governance practise in a company. It has been observed that in order to increase effective progress, institutional investors are needed to be given additional space in the company to monitor their affairs.

Institutional investors should conduct themselves more efficiently for the betterment of the corporation with better discussions regarding their corporate governance practises and sensible voting. With more institutional investors involved in the discussions and active working of the company, it would ensure a sense of transparency between both the parties.?Furthermore, it would result in active participation of institutional investors and effective corporate governance practices. Practicing corporate governance for the betterment of the corporation and the shareholder relationship would increase efficiency in workings of the company and efficient corporate governance.

CONCLUSION

It has been observed that Institutional Investors are subjected to different behaviours in different countries. In India, it is seen that the investors tend to be more laid back and not participating enough in the workings of the corporations which results in a negative impact on the corporate governance. Furthermore, the investors tend to inject their money only in those companies where they find that there are low costs in auditing and managing the corporate governance which creates a disbalance in the market. If the investors decide to not divulge into the workings of the company and only profit from their shareholding, then that move would be considered selfish. It is important for the investors and the corporation to create balance by working more together more efficiently in order to produce a better output on the corporate governance front. In foreign countries as mentioned above, the workings are almost on the similar lines.

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[1] Openknowledge.Worldbank.Org, 2004, https://openknowledge.worldbank.org/bitstream/handle/10986/14465/350840IN0REV0Corporate0rosc1cg.pdf?sequence=1&isAllowed=y.