Associate Professor Umakanth Varottil

Corporate governance in India: The transition from code to statute

The Cadbury Report in the United Kingdom sparked a proliferation of corporate governance codes in various countries around the world, and India was one of them. Curiously, the first corporate governance initiative in India was sponsored by industry in 1998 when the Confederation of Indian Industry recommended a code for “Desirable Corporate Governance,” which was voluntarily adopted by a few companies. However, soon after in 2000, corporate governance norms took on a mandatory character when they were incorporated in the listing agreement prescribed by the securities regulator, Securities and Exchange Board of India. Although the consequences for non-compliance were unclear at the time, legislative amendments later introduced stiff penalties for violation. The shift from “soft law” to “hard law” became complete when Parliament enacted the Companies Act, 2013, which incorporates detailed corporate governance provisions, which are not only mandatory in nature but are also accompanied by enforcement mechanisms.

This paper will identify the historical factors and justification for India’s approach towards complete transition to “hard law” in corporate governance. For example, a statutory approach towards corporate governance comports with the strong regulatory oversight over the corporate sector in India, and is also understandable given the concentration of shareholding in Indian companies and the limited presence of sophisticated players such as influential institutional investors. At the same time, a wholly mandatory approach is bound to introduce complexities. Given the inherently dynamic nature of corporate governance norms that require reconfiguration on a periodic basis, their inclusion in the corporate law statute will result in a great amount of rigidity, as legislative amendments could be fraught with delays and difficulties. This paper seeks to analyse these various considerations and offers suggestions for potential reforms.