Corporate governance in India

By Priya Chetty on January 12, 2012

A mushrooming empirical literature has begun to record important features of corporate governance in India. Jayati Sarkar and Subrata Sarkar demonstrated that corporate boards of large companies in India in 2003 were a little smaller than those in the United States (in 1991), with an average of 9.46 member in India compared to 11.45 in America (Sarkar & Sarkar, 2000).Though the percentage of inside directors was roughly comparable (25.38% compared to 26% in the U.S.), Indian boards had comparatively fewer independent directors, (just over 54% compared to 60% in the U.S.) and more affiliated outside directors (over 20% versus 14% in the U.S.). 41% of Indian companies had a promoter on the board, and over 30% of cases had a promoter that served as an Executive Director. It has been proven that larger boards lead to poorer performance (market-based as well as in accounting terms), both in India and in the United States (Ghosh, 2006).

The median director in a big Indian company held 4.28 directorships in 2003, and this number is noticeably (and statistically significantly) higher for directors in group-affiliated companies (4.85 versus 3.09 for non-affiliated companies) (Sarkar & Sarkar, 2003). The figures were similar for inside directors, being 4.34, 4.95 and 3.06 for large companies, group affiliates, and non-affiliated companies, respectively. As for independent directors, however, the median number of positions held was 4.59 and there were no major differences between group and stand-alone companies. Fascinatingly, independent directors with multiple directorships are related with higher firm value in India while busier inside directors are associated negatively with firm performance. Busier independent directors are more meticulous in terms of attending board meetings than their counterparts with fewer positions. As for inside directors, it seems that the pressure of serving on multiple boards (due largely to the prevalence of family owned business groups) does affect the directors’ performance.

Yet, busy independent directors appear to be associated with a greater degree of earnings management when measured by discretionary buildups (Sarkar, Sarkar & Sen, 2006) Multiple positions and non-attendance of board meetings by independent directors are associated with higher discretionary accumulation in firms. Even after controlling these characteristics of independent directors, board independence does not seem to affect the degree of earnings management. However, CEO-duality, where the top executive also chairs the Board, and the presence of controlling shareholders as inside directors, are associated with a greater earnings management. Shareholding patterns in India have revealed a significant level of concentration in the hands of the promoters. In 2002-03, Jayati Sarkar and Subrata Sankar found that promoters held 47.74% of the shares in a sample of almost 2500 listed manufacturing companies, and held 50.78% of the shares of group companies and 45.94% of stand-alone firms (Sarkar & Sarkar, 2005a). In comparison to those figures; the Indian public’s shared amounted to 34.60%, 28% and 38.51%, respectively. As for the impact of concentrated shareholding on firm performance, an earlier study by the same authors finds that in the mid-90’s (1995-96) holdings above 25% by directors and their relatives was associated with higher valuation of companies while there was no clear effect below that threshold (Sarkar & Sarkar, 2000). More recently, based on 2001 data that distinguishes between “controlling” insiders and non-controlling groups, Ekta Selarka reports a U-shaped relationship between insider ownership and firm value, with the point of variation lying at a higher level, between 45% and 63% (Selarka, 2005).


  • Jayati Sarkar and Subrata Sarkar, 2000. Large Shareholder Activism in Developing Countries: Evidence from India,” International Review of Finance,1, pp. 161-94.
  • Saibal Ghosh, 2006, Do board characteristics affect firm performance? Firm level evidence from India, Applied Economic Letters 13, pp. 435-443.
  • Sarkar Jayati, Subrata Sarkar and Kaustav Sen, 2006 Board of Directors and Opportunistic Earnings Management: Evidence from India, Working Paper, Indira Gandhi Institute of Development Research, Mumbai, India.
  • Ekta Selarka, 2005, “Ownership Concentration And Firm Value — A Study From The Indian Corporate Sector”, Emerging Markets Finance And Trade 41, pp. 83–108.