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 [email protected].]
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
The political economy for amending the law to subject
state-owned corporations to
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

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.

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