Listed Government Companies and Corporate Governance: A Supplement

A previous post on this Blog by Mr. Jayant Thakur raises valid issues regarding corporate governance and government-owned companies. Although I am in agreement with the position stated, it may be useful to highlight certain other complexities this matter gives rise to. I initially began by writing a comment to his post, but owing to its length, decided to post it separately as a supplement. Here are the additional issues:

1. As pointed out in Mr. Thakur’s post, Government companies that raise finance from the capital markets ought to be subject to the same requirements that other companies are subject to. Listed government companies too have minority shareholders (banks, financial institutions, both domestic and foreign, and the general public) like any other listed company in the private sector. It is curious as to why the minority shareholders in Government companies should be given separate treatment (indeed inferior protection from a corporate governance standpoint) compared to shareholders in other listed companies. SEBI’s current order impliedly seeks to make such a distinction.

2. Is there a reversal in SEBI’s position? For the last few years, since introduction of the new corporate governance norms (i.e. the amended clause 49 of the listing agreement), SEBI has been publicly adopting a stern stance that government companies will not be given any waiver from compliance with the listing agreement. In fact, one of the reasons for the delay in implementation of the 2004 amendments to clause 49 until January 1, 2006 was for companies (especially government companies) to put in place mechanisms such as independent directors and audit committees. That position also seems to be the genesis for the notices issued last year under which the present adjudication took place. However, the recent adjudication orders will certainly soften the regulatory stance towards government companies.

3. The SEBI orders also expose serious lacunae in the regulatory oversight with reference to corporate governance, and may necessitate a review of the entire mechanism for implementation of corporate governance. On its merit, it may not be possible to go to the extent of criticising the SEBI order as being bad in law. What may perhaps deserve some criticism is the law itself. The current scheme on corporate governance is administered through the listing agreement. Therefore, SEBI and the stock exchanges have privity with, and cause of action against, the companies that are parties to the listing agreement and not any against dominant or controlling shareholders (e.g., the Government in case of a government-company). Whenever there is a violation of the listing agreement, various actions may be initiated against the listed company, one of which would be to seek to delist the company from the stock exchanges. But, the irony of it all is that when actions such as delisting are initiated against the company, it is the minority shareholders that suffer although the corporate governance mechanisms through the listing agreement were set up to protect their interests in the first place.

Of course, this is not an issue peculiar to India, as most other countries (including U.S., Singapore, China, etc.) administer their corporate governance mechanisms through the listing agreement. However, it is necessary to ponder whether there could be other mechanisms available to ensure compliance with corporate governance norms, which measures target not only the listed company but also its dominant shareholders. One solution may be to incorporate some of the corporate governance norms under company law that may have wider application and recourse to a larger number of players in the corporate governance arena. Such a move appears to have been taken, at least partially, with the Companies Bill, 2008 introducing requirements as to independent directors, which is otherwise within the realm of SEBI.

4. Moving from a technical level towards a softer element of corporate governance, one always finds that good governance is a matter that ought to be inculcated in the corporate actors (whether they be companies, directors, officers, auditors, dominant shareholders, etc.) and there would be limitations in mandating corporate governance through law. In other words, corporate governance involves more substance than form, more spirit than the letter of the law. From that perspective, compliance or otherwise of corporate governance norms by government companies has an important signalling effect. Strict adherence to these norms by government companies may persuade others to follow as well. But, when government companies violate the norms with impunity, it is bound to trigger negative consequences in the market place thereby making implementation of corporate governance norms a more arduous task.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Supreme Court of India has taken note of lawyer absenteeism in courts while their client matters come up for hearing and has made an observation that the client should not suffer on account of lack of professionalism of his lawyer.

    The case is: The Secretary, Department of Horticulture, Chandigarh and Anr. Versus Raghu Raj (Civil Appeal No. 6142 of 2008 (Arising out of Special Leave Petition (Civil) No. 1583 of 2007)

    Newspaper report is available at:

  • Thanks, Mr. Umakanth for raising certain broader and other pertinent issues.

    One more issue is whether these and other problems arise from our aping in India the US/UK Model Corporate Governance. These Western Models are based on ownership structures where the typical holding of “management” is about 8% as compared typically 50% in India. There, we need protection of the Company itself from such management while here we need to counter the majority-holding Promoters but in a fair way. Thus, in US, for example, we need Remuneration Committees to control remuneration of senior executives which control, for most practical purposes, is redundant in India but still Clause 49 provides this, though as an option. The CEO/CFO certification is relevant abroad since these guys wield substantial powers. The reality in India of professional CEO/CFOs in the context of Promoter controlled companies is wholly different. Still, we ape these and other requirements. In this mindless mirroring, we end up also being unfair to the Promoters – we require Companies in which Promoters hold 50-75% to have 50% independent directors if the Chairman is from the Promoter Group. No wonder Promoters in many cases get their “independent” nominees appointed.

    In a DFID/Oxford University sponsored research on corporate governance in India, the Paper of January 2001 by Jairus Banaji and Gautam Mody highlighted in detail this unique circumstance of India and how the otherwise revered Cadbury Report may be fatally irrelevant to India. For example, they observed, “Cadbury (Report) is not tailor-made to a context where dominant shareholders, e.g., promoters, control management and where the corporate governance problem is chiefly one of the protection of minority shareholder rights”. They observed at another place, “The assumption of dispersed ownership is seen to be limited in at least two ways once we extend this largely American model to the contemporary world and to corporate and to corporate regimes outside the US and the UK…the dispersion of shareholding cannot be, and was never, a valid description of those situations, such as in Europe, India, and East Asia, where corporate ownership patterns have traditionally been highly concentrated..”.

    I am not saying that there are no corporate ills in India or that corporate governance per se is irrelevant to India. But the disease is different and the cure, therefore, has to be different.

    Thanks again.

    – Jayant

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