Evolution of corporate governance in India and its impact on the growth of the financial market: an empirical analysis (1995-2014)

Abstract

Purpose The past few decades have seen a gradual convergence in corporate governance norms the world over, entailing a discernible shift towards shareholder primacy models. It holds particularly true of developing countries, many of which have steadily amended corporate governance norms to enhance the scope of shareholder rights. This is usually justified through the rationale that increasing protection for foreign investors and shareholders would mean greater investment in capital market and overall financial market development. In India, the shift coincides with a series of fundamental economic and financial policy reforms initiated in the 1990s: collectively and loosely referred to as “liberalisation”, this process marks a paradigm-shift from a tightly controlled welfare economy to one considerably more laissez-faire in its orientation. A fallout of which was that the need to attract and sustain foreign investments acquired an unprecedented significance. The purpose of this paper is to help the readers understand in this larger context the corporate law reform initiatives in India, particularly those pertaining to shareholder rights and allied issues. Design/methodology/approach This paper empirically tests the hypothesis that enhanced shareholder protection leads to greater levels of investments, and financial developments generally. It then uses regression analysis to detect if the change in corporate governance, making it more shareholder-friendly, has had any effect on growth in financial market. It is divided into two broad parts. The first tracks the evolution of corporate governance norms in India. A robust qualitative and quantitative analysis is used to determine the tilt towards a shareholder primacy regime that Indian corporate governance regime now displays. The second chapter deals with the regression analysis where the outcome variable is financial market growth, and explanatory variable is the change in the governance regime with relevant control variables. Findings The authors find that change in shareholder primacy corporate governance has little effect on financial market growth in India. The authors would suggest that instead of changing the law in books, more emphasis should be given to implement those regulations and increase the overall rule of law. Originality/value This is the first time that such a wide-scale study has been conducted in India, using Bayesian methods. It ought to be of immense value to professionals and academics both.