International In-house Counsel Journal Vol. 5, No. 19, Spring 2012, 1

The Ownership Structure and Corporate Governance in Major Private Sector Companies of India (2000 -2010)

V.K.MALHOTRA Associate Professor, Department of Economics, C.C.S.University, India & MANOJ KUMAR AGARWAL Assistant Professor, Department of Commerce, Meerut College, Meerut, India

Abstract The issue of ownership structure and its effect on corporate governance has invited interest and attention from researchers in the United States, Europe and the other parts of the world. The area remains under explored in the Indian context. This paper attempts to study the trend of changes in the ownership structure of the ten largest private sector companies (excluding public sector, banking and financial sector companies as these are regulated by a different set of philosophy, rules/norms) and its effects on the corporate governance in the studied companies over the period 2000 to 2010. The basic assumption behind studying the largest companies is that the top companies are first subjected to the changes in trend. For the purpose of analysis, the study uses the ownership format prescribed by the Securities and Exchange Board of India for submission by the companies to the stock exchange/s. The broad categories include- Promoters and Promoter group, Public Shareholding/Non-promoter Group comprising of Institutional Investors, and Non-Institutional Investors. Under these major categories the sub-category wise division of share-holding has also been analysed. To notice the corporate governance situation in the studied companies, a composite index comprising of Board-related, CAT-related (Complaints, Audit Fee, and Tax dues) and Finance-related aspects has been constructed. The study shows that in the major companies of India there has been a tendency towards concentration of share-holding in favour of the major share-holder category ‘Promoter and Promoter Group’, a shift of shares within the category of Institutional Investors in favour of Foreign Institutional Investors to a large extent, and Banks, Financial Institutions and Insurance Companies to a small extent at the cost of the share-holding of Mutual Funds and UTI. Individual Investors in the category of Non-Institutional Investors have also got their holdings diminishing over the study period. The companies selected being India’s corporate majors have been largely adhering to board- related norms and have shown improvement on CAT aspects of corporate governance while they still have a good scope to improve with respect to financial aspects of corporate governance. The global slowdown has also affected the financial performance adversely. Introduction: (a) Ownership Structure Ownership structure has important implications for corporate governance and protection of minority shareholders’ interest. Concentrated ownership structures and affiliation of companies with business groups is a common feature of Asian economies (Claessens and Fan, 2002). In India, as in most other emerging markets, families typically control groups. Performance effects of group affiliation in India are by and large positive because groups could be substituting missing and poorly functioning institutions (Khanna, 1999).

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online 2 Manoj Kumar Agarwal & V.K.Malhotra

Concentrated ownership in India is not entirely associated with the ills that are ascribed to it in emerging markets ( Khanna and Palepu, 2004). Some Indian families are seen to have tried to leverage internal markets for capital and talent inherent in such business group structures to launch new ventures where external markets are lacking. Thus, concentrated ownership has been found to be a result, rather than a cause of inefficiencies in markets. In case of China, an emerging economy, it is observed that ownership structure has significant effects on the performance of companies (Xu and Wang, 1997). Large institutional shareholders are important for corporate governance and performance and there are potential problems in an overly dispersed ownership structure. In India corporate performance has been attempted to be related to the presence of various types of shareholders but the evidence does not seem to be conclusive that it may avoid any further questioning. For instance, Khanna and Palepu (2000) noted that domestic institutional investors were poor monitors of controlling shareholders while foreign institutional investors (FIIs) were good monitors. Similarly, Mukherjee and Ghosh (2004) noticed that among the institutional investors, FIIs were the most consistent in stock picking whereas the performance of the domestic institutional investors was sporadic and volatile at best. Mohanty (2002), however, found that the development financial institutions have lent money to companies with better corporate governance measures. Mutual funds have invested money in companies with better corporate governance record. Lending institutions start monitoring the managements effectively once they have substantial equity holdings in the company and monitoring is reinforced by the extent of debt holdings by these institutions (Sarkar and Sarkar, 2000). It has been further observed that block holdings by directors increase company value after a certain level of holdings. The ownership structure is defined by the distribution of equity with regard to capital and also by the identity of the equity owners. Ownership structure is the most important factor in shaping the corporate governance system of any country. In particular, it determines the nature of the agency problem, that is, whether the principal conflict is between managers and shareholders, or between controlling and minority shareholders. Two key aspects of corporate ownership structure are: (1) Ownership Concentration, and (2) Ownership Composition. The degree of ownership concentration in a company determines the distribution of power between its managers and shareholders. When ownership is dispersed, shareholder control tends to be weak because of poor shareholder monitoring. A small shareholder would not be interested in monitoring because he or she would bear all the monitoring costs, but only share a small proportion of the benefit. When ownership is concentrated, large shareholders could play an important role in monitoring management. Controlling shareholders may act in their own interests at the expense of minority shareholders and other investors. The composition of corporate ownership structure implies who the shareholders are and more importantly, who among them belong to the controlling group/s. A shareholder can be an individual, a family or family group, a holding company, a bank, an institutional investor or a non-financial corporation. If a family or family group were a significant shareholder, it would be more likely interested in control benefits as well as in profits. On the other hand, an institutional investor, who is a significant shareholder, is more likely interested in profits only. A problem associated with banks being significant shareholders of non-financial corporations is that they may become soft in granting loans resulting into bad investment projects. Here lies the conflict of interest that may arise when banks are both owner and creditor. Corporate Governance 3

When ownership is separated from management, a basic question for shareholders is how they can effectively monitor managers and exercise control so that the managers will act in the shareholders' best interest. A number of mechanisms exist for shareholders’ monitoring and control. The most important are the system of the board of directors, shareholders’ participation, performance-related executive compensation, legal protection of shareholder rights and transparency and disclosure requirements. These mechanisms are mostly rooted in corporate laws and other legislation. (b) Corporate Governance There is no universal agreement on what Corporate Governance should be defined as. Friedman conceptualizes corporate governance as “the conduct of business in accordance with shareholders’ desires, which generally is to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs.” Monks and Mellow (2004) view corporate governance as “relationships among various participants in determining the direction and performance of a corporation.” The primary participants in a corporation are the tripod of- shareholders, management (professionals) and the board of directions. Employees, customers, suppliers, creditors, government and the community are other participants. Cadbury Committee of United Kingdom has defined corporate governance as “(It is) the system by which companies are directed and controlled.” Corporate governance is to be looked from the perspective of its creative, positive, regenerative and prosperous aspects. Good governance has been an eternal source of inspired thinking and dedicated action. Corporate governance is about promoting corporate fairness, transparency and accountability. A sound corporate governance system requires that shareholders can actively participate in and apply influence on corporate strategic decision making. This depends on whether shareholders’ legal rights are adequately protected. Transparency and information disclosure are keys to effective shareholders’ control and protection. Information about a company usually includes company objectives and policies, financial results of the company, major share ownership, who the members of the board of directors and key executives are, and their remuneration, foreseeable major risk factors, and governance structures. The quality of transparency and disclosure depends crucially on the standards of accounting and auditing, and that of the financial reporting system. The Backdrop Most of the literature considers that corporate ownership structure does matter and has a significant effect on corporate governance and firm performance. The field now known as corporate governance dates back to Berle and Means classic work, ‘The Modern Corporation and Private Property’(1932). They observed that capital in the United States had become heavily concentrated during the previous few decades and that this vested a relatively small number of companies with enormous power. As these firms grew, it became increasingly difficult for the original owners to maintain their majority share holdings, and stocks became dispersed among a large number of small shareholders. The consequence of this dispersal was the usurpation of power by the firm managers, who ran the day-to-day affairs of the firm. Their concern about the separation of ownership from control was not only about managers’ lack of accountability towards investors but was also a concern about managers’ lack of accountability to society in general. So, the governance issues began to arise. Questions of control are framed as a struggle between management and shareholders with the board of directors serving as the platform for the struggle. Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. Corporate governance developed as a way of ensuring that investors receive a return on their 4 Manoj Kumar Agarwal & V.K.Malhotra investment by protecting them against the risk of management expropriation. Until the eighties, the scholars have been paying attention to the issue of ownership concentration, the main worry being the cost involved in separation of ownership and control, i.e., the agency costs (Jensen and Meckling, 1976; Fama and Jensen, 1983). Dispersed ownership in large firms increases the principal-agent problem due to asymmetric information and uncertainty. The contracts between managers and shareholders are unavoidably incomplete as future contingencies are difficult to describe. There is a widespread consensus that a higher degree of control by an external shareholder enhances productivity performance: more monitoring presumably increases productivity (Shleifer and Vishny, 1986). When the equity is widely dispersed, minority shareholders do not have appropriate incentives to monitor managers who, in turn, can expropriate investors and maximize their own utility instead of maximizing shareholder value. Concentrated ownership in the hands of outsiders is also often advocated on the ground that it facilitates the provision of capital. In the majority of countries, large corporations have large owners who are active in corporate governance. So, monitoring the managers is not the main problem of corporate governance and the real concern is the risk of the expropriation of minority shareholders. Concentrated ownership may negatively affect firm performance through its impact on managerial initiative. If concentrated ownership provides incentives to control the management, it may also reduce the manager's initiative or incentives to acquire information. Concentrated ownership is costly for large shareholders because it limits diversification and reduces the owners' tolerance towards risk. The interests of control are different from and often opposed to those of ownership as stockholders intend to maximize the corporate profit whereas the manager aims to maximize his personal profit. The agent (manager) does not always behave in the interests of the principal (shareholder) which induce agency costs in a firm. As a solution to this problem, Jensen and Meckling (1976) have suggested that if the agent becomes the principal by owning a part of the firm, he or she will also get the incentives to act in a profit maximizing behaviour. A large shareholder is another possible solution to this ‘free-rider problem’ (Grossman and Hart, 1980). With a high residual claim in the firm, the large shareholder may have both the incentives and means to monitor the firm and to initiate a takeover of the management if they are displeased with the present one. Block-holding is also another way to control the firm as the achievement of block- holding status provides one an opportunity to become insider and reap benefits of control. The role and impact of insider block holdings is a key issue in the corporate governance debate though the issue of private benefits associated with family control, particularly through pyramid structures, is still an under-researched area. The board is an effective corporate governance mechanism. The primary board related issues include the size and structure of the board, the number of directors that comprise the board, the fraction of these directors that are outsiders, and whether the same individual holds the CEO and chairperson positions. In the Last several decades there has been a dramatic shift away from boards dominated by inside directors toward boards dominated by outside directors. A principal reason for this change has been the growing concern that inside directors (i.e. corporate employee) tend to be self-serving. Many commissions and scholars have embraced the idea that appropriate board composition is important for good corporate governance. Codes of Best Practice have been issued in a number of European countries. Common to most of these codes is a requirement for specified numbers of independent directors on the boards of firms in the country. The evidence regarding the effectiveness of boards of directors in the world is scattered (Blasi and Shleifer, 1996). Corporate Governance 5

Most of the researches on corporate Governance attempt to find answer of the basic questions - Does corporate governance affect firm performance or relative market value? Second, how does it affect the performance through decision making process? Most of the studies have evolved against the backdrop of developed economies, while there are much lesser known empirical works about such issues in the emerging market economies such as India. Chibber and Majumdar, 1988; Verma, 1997; Sarkar and Sarkar, 1999; Goswami, 2000; and Dahiya and Gupta, 2002 are some known works pertaining to different dimensions of corporate governance in India. This paper attempts to study the trend of changes in the ownership structure of the ten largest private sector companies (barring banking and financial sector companies as these are regulated by a different set of rules/norms) and the state of corporate governance in these companies over the period 2000 to 2010. The basic assumption here is that the largest companies are first subjected to changes and they lead the trend as well. The Method of Selecting the Companies The organizations that are involved in ranking the corporate firms in India assign the ranking on the basis of sales (turnover), profits, size of assets and market capitalization. In this respect it was found that Forbes prepares a list of Global majors every year and in ranking those majors all the four criteria are accounted for. In order to make a selection of private sector firm for the purpose of study Forbes Global 2000 ranking for 2009 has been used. From the list of 40 top ranked companies, the public sector enterprises and also the private sector banking and financial sector organisations have been excluded. Besides this, Tata Consultancy Services Limited, DLF Limited, ITC Limited and Grasim Industries Limited have been left out due to constraints in accessing the desired data pertaining to these firms; and finally, a list of 10 major private sector corporate companies was prepared for the study. These include Reliance Industries Limited; Tata Steel Limited; Bharti Airtel Limited; Reliance Communications Limited; Larson & Tourbo Limited; Hindalco Limited; Infosys Limited; Wipro Limited; Tata Motors Limited; and Sun Pharmaceutical Limited. (Hereafter names of the companies appear without the word ‘Limited’) Method for classification of Ownership For classification of ownership and control pattern, the format prescribed by the Securities and Exchange Board of India (SEBI) to the stock exchanges for collecting the data from the companies has been followed. The format divides the shareholding into major categories, namely (i) Promoters and Promoter group, (ii) Public Shareholding/Non-promoter Group comprising of Institutional Investors, and (iii) Non- Institutional Investors. These major categories are further sub-divided into Indian Promoters and Foreign Promoters for the first major category; Mutual Funds and UTI, Banks, Financial Institutions, Insurance Companies, and Foreign Institutional Investors for the second major category; and Private Corporate Bodies, and Individuals for the third major category. Index to measure Corporate Governance A composite Index of Corporate Governance has been constructed and it is arithmetic mean of three indexes dealing with different dimensions of corporate governance, which include- Board-related Corporate Governance CAT-related Corporate Governance Finance-related Corporate Governance 6 Manoj Kumar Agarwal & V.K.Malhotra

The Board-related Index consists of the following five parameters, namely size of the board, meetings of the board, number of independent directors, attendance of all directors in board meetings, and attendance of independent directors in the board meetings. For the purpose of scoring and making the values comparable, the normalisation has been done taking into consideration actual number of board members, the minimum legal requirement of board membership, highest number of board members, and the lowest number of members among all the selected companies. The same technique has been used for the number of meetings and number of independent directors also with the only difference that the minimum (legal) number of meetings required in a year is 4 and minimum number of independent directors required is 50 per cent of the board size. The values have been converted on a scale of 0 to 10 where ‘0’ is the lowest value and ‘10’ is the highest possible value. For attendance, simple percentages divided by 10 have been used for scoring. Here the assumption is that the larger board size, number of meetings, number of independent directors and attendance is indicative of greater concern for corporate governance. CAT-related corporate governance parameters include the following- 1. ‘C’ as Number of complaints against the company by the shareholders in respect of the category of individual shareholders. 2. ‘A’ stands for Audit Fee paid by the company in respect of the turnover of the company in that year. 3. ‘T’ stands for Tax dues not deposited with appropriate authority on account of disputes viewed in respect of the turnover of the company in that year. Since all of these are negative indicators, so, their values have converted and reversed on a scale of 0-10 to make them at par with the positive indicators. The values have been normalised for comparison. Here again the assumption is that a well governed corporate firm would like to keep the number of complaint, Audit Fee and Outstanding tax liability at minimum. Finance-related corporate governance parameters include: 1. Return on equity 2. Return on capital employed 3. Earning before Interest and Tax (EBIT) in proportion to Turnover 4. Growth in Book Value of equity shares These have been arrived at in terms of percentages and then made comparable by way of normalization and thereafter these values have been converted on a scale of 0-10. Return on Equity, and Return on Capital Employed are distinguished in order to examine the difference in managerial prudence in making use of the external capital. Book Value of the equity share has been considered as a better representative of the real value in comparison with market price of share of a company. Ownership Structure in the Selected Companies In the study, it is clearly revealed that the ownership pattern in Reliance Communications and Tata Motors has got more concentrated in favour of Indian Promoters and Promoter Group though the degree of this concentration varies from about 68 percent in Reliance Communications to 42 per cent in Tata Motors and 35 per cent in Hindalco. Reliance Industries had a good degree of concentration in 2000-2001 standing at 43 per cent level which has further increased to about 47 per cent in the year 2009-10. Bharti Airtel has Corporate Governance 7 also maintained high degree of concentration by Indian Promoters and Promoter Group and its extent has been as high as 45 per cent. Wipro Limited presents a case of a very high degree of concentration at 81 per cent in favour of Indian Promoters and Promoter Group. In Sun Pharmaceuticals also the ownership is again concentrated up to a level of 64 per cent in favour of Indian Promoters and Promoter Group. Tata Steel Ltd also has shown a tendency of Indian Promoters and Promoter Group increasing their share to a level of 31.5 per cent. Among the companies selected for the purpose of study, Infosys is the only exception to the phenomenon of increasing concentration of Indian Promoters and Promoter Group as their share in the company has come down by 9.5 per cent over this period of ten years i.e. from 2000-01 to 2009-10. Larsen & Toubro (L&T) has continued to be a unique case in terms of the fact that Promoters and Promoter Group category did not have a noticeable presence in 2000-01 and the same situation has been continued with. In the institutional investor category, the share of Mutual Funds & UTI in the share holding has shown a trend of fall to the extent of 2 to 3 per cent. This trend is observed in Reliance Industries, Tata Steel, Reliance Communications, Hindalco, Tata Motors, and Sun Pharmaceuticals; Bharti Airtel had a low share of Mutual Funds & UTI, and that situation is nearly maintained. Infosys has also seen the similar changes with the only difference that the share of Mutual Funds & UTI has come down at greater rate from 13.5 per cent to 5 per cent. Wipro almost on all occasions continued to have less than 1 per cent share in capital by Mutual Funds & UTI. Among these companies Larsen &Toubro is the only company which has still a sizeable share of equity held by Mutual Funds & UTI and their share has increased by 2 per cent to 14.5 per cent during the study period. The share of Banks, Financial Institutions and Insurance Companies in the equity holding has increased in the companies selected for the study though the rate of rise has varied. Tata Steel and Larsen & Toubro have continued to have a high proportion by this sub- category of institutional investors as the category has about 21 per cent and 25 per cent share respectively in the equity capitals of the companies. In Tata Motors also, the share of this sub-category is around 18 per cent. All these companies have largely maintained the share of the category. In Reliance Industries, Bharti Airtel, Reliance Communication, Hindalco and Infosys, the share of these institutions has increased from 3.5 per cent to 8.4 per cent, 0.01per cent to 5 per cent, 6.6 per cent to 8.3 per cent, 8.4 per cent to 14 per cent and 1 per cent to 5 per cent respectively. The trend has been largely that of consistent rise. Sun Pharmaceuticals and Wipro have also witnessed some rise in the shareholding of this sub-category but their share remains at a low level of 3 per cent and 1 per cent respectively. So, in most of these companies the sub-category of Banks, Financial Institutions and Insurance Companies have got significantly increased share in ownership. Foreign Institutional Investors have increased their share in ownership of these companies. In Infosys it has become 45 from 29 per cent, in Hindalco it has increased from 18 per cent to 32 per cent, in Tata Steel it has risen to 22 per cent from merely 3.6 per cent, in Bharti Airtel from 5 per cent to 18 per cent, in Tata Motors from 6.6 per cent to 20.6 per cent and in Sun Pharmaceuticals from 11 per cent to 20 per cent. Reliance Industries and Larsen & Toubro had a good level of participation by Foreign Institutional Investors in 2000-01 itself as their shares stood at 17.3 and 13.3 per cents and these shares have further gone up to 18.3 and 14.5 per cents respectively. The only exception to this trend of increasing share of foreign institutional investors is Reliance Communications where it has come down from 19.9 per cent to 7.7 per cent. In general, a tendency of ownership pattern moving in favour of foreign institutional investors is observed here. 8 Manoj Kumar Agarwal & V.K.Malhotra

Institutional Investors’ share, on the whole, has moved up in Tata Steels, Bharti Airtel, Larsen & Toubro, Hindalco, Infosys, Wipro, Tata Motors, and Sun Pharmaceuticals from 33 per cent to 45 per cent, 7 per cent to 26 per cent, 48.6 per cent to 54.5 per cent, 41 per cent to 49 per cent, 43 per cent to 54 per cent, 2.9 per cent to 9 per cent, 30.5 per cent to 41 per cent and 15.4 per cent to 25.7 per cent respectively. Within the major category of institutional investors, the shares of foreign institutional investors have grown at the highest rate, and Banks, Financial Institutions and Insurance Companies’ have followed foreign institutional investors in terms of increasing their share in ownership while Mutual Funds and UTI have got their share shrinking in most of these companies. In the Non-institutional Investors’ category, Reliance Industries, Bharti Airtel, Hindalco, Infosys, Wipro, and Sun Pharmaceuticals constitute the list of those companies in which the share of Private Corporate Bodies has increased from 1.9 per cent to 4.8 per cent, 2 per cent to 3.5 per cent, 3.1 per cent to 4.5 per cent, 1.5 per cent to 6.6 per cent, 1.8 per cent to 2.8 per cent and 3 per cent to 5 per cent in the respective order. While their share in ownership has declined in Tata Steel from 6.5 per cent to 2.9 per cent, Reliance Communications from 6.3 per cent to 2.4 per cent, Larsen & Toubro from 10.6 per cent to 6.5 per cent and Tata Motors from 13.5 per cent to 0.7 per cent. In most of the cases the share of Private Corporate Bodies has remained around or below 5 per cent of the total shareholding. The Individual Investors’ sub-category has shrunk quite considerably in all companies selected for the study, the fall has been very strong in Bharti Airtel from 44 per cent to 2.8 per cent, Tata Steel form 34.5 per cent to 20.7 per cent, Reliance Communications from 25 per cent to 12 per cent, Hindalco from 34.3 per cent to 14 per cent and Tata Motors from 30.6 per cent to 16.4 per cent, while the reduction has been moderate in Reliance Industries from 22.6 per cent to 19.4 per cent, Larsen & Toubro from 40.8 per cent to 39 per cent, Infosys from 26 per cent to 19 per cent, Wipro from 11.4 per cent to 7.2 per cent and Sun Pharmaceuticals from 9.4 per cent to 5.6 per cent. In all, there has been a tendency to descend in the ownership by this sub-category. All most all these companies except Reliance Industries have witnessed plummeting share of Non-institutional Investors in the equity of the company. In Reliance Industries also, the trend is suggestive of a fall, although the rate of fall is too nominal. In some cases such as in Tata Steel, Bharti Airtel, Reliance Communications, Hindalco Industries, and Tata Motors the fall is very prominent while in case of Larsen & Toubro, Infosys, and Wipro, this drop has happened at a very small rate. Corporate Governance in the Selected Companies On the basis of company averages (simple average for the entire period of study) on Board, CAT and Finance-related Indexes and also on Composite Corporate Governance Index, the companies being studied can be arranged in a ranked order (below) and a company’s average on that dimension can be compared with the rest of the companies and as also with the average of all companies taken together, and this average can be viewed as a benchmark to assess a company as ‘above average’, ‘average’ or ‘below average’ among the companies under consideration. Larsen & Toubro, Tata Steel, Infosys, and Reliance Industries are the companies that have done better than other selected companies on Board-related Corporate Governance. These companies have large boards going up to 15-16, provide the required representation to independent members, and have more frequent board meetings having greater percentage of attendance in these meeting.

Corporate Governance 9

Ranking of Companies CAT Finance-related Board-related Composite Corporate Corporate Rank Corporate Governance Governance Governance Governance Scores Scores Scores Scores 1 Larsen & Toubro (6.56) Infosys (9.52) Infosys (6.79) Infosys (7.26) Sun Pharma. 2 Tata Steel (5.87) Hindalco Ind. (8.35) (5.76) Tata Steel (6.13)

3 Infosys (5.47) Reliance Ind. (8.20) Wipro (5.60) Wipro (6.07) Sun Pharma. 4 Reliance Ind. (5.36) Wipro (8.17) Tata Steel (5.36) (5.95) Larsen & Toubro Bharti Airtel Larsen & Toubro 5 Tata Motors (4.97) (8.17) (4.67) (5.88) Reliance Comm. Reliance Comm. Bharti Airtel 6 Bharti Airtel (4.91) (8.17) (3.43) (5.77) Tata Motors Tata Motors 7 Sun Pharma (4.87) Tata Motors (8.11) (3.10) (5.39) Reliance Ind. Reliance Ind. 8 Reliance Comm. (4.49) Bharti Airtel (7.72) (2.92) (5.49) Larsen & Toubro Reliance Comm. 9 Wipro (4.45) Sun Pharma. (7.22) (2.91) (5.36) Hindalco Ind. Hindalco Ind. 10 Hindalco Ind. (4.31) Tata Steel (7.16) (2.83) (5.16)

Average 5.13 8.08 4.34 5.85

These companies have relatively lesser concentration of Promoter & Promoter Group shareholding. Larsen & Toubro does not have any such holding, Tata Steel has 31 per cent and Infosys has it around 20 per cent while Reliance Industries is the only company where Promoters’ share is 46.5 per cent. On the other side, the companies that have not achieved well in board-related corporate governance aspect include Wipro that has 81 per cent shareholding from Promoters and Promoter Group, Reliance Communications has it at 68 per cent and Sun Pharmaceuticals at 64 per cent. Hindalco has Promoters & Promoter group share in equity at 35 per cent but is characterised by lesser number of board meetings and comparatively low rate of attendance, leading it to score scantily on this parameter. In the context of CAT (Complaints by individual shareholders, Audit Fee, Tax Dues), a good number of companies such as Infosys, Hindalco, Reliance Industries, Wipro, Larsen & Toubro, Reliance Communications and Tata Motors have achieved high index scores. The companies that lie below the average of all of these include Tata Steel, Sun Pharmaceuticals and Bharti Airtel though they have also been able to attain a score of more than 7.00. It reveals that largest Indian companies have sufficiently been concerned about these aspects of corporate governance. Most of these companies have made efforts to keep the number of complaints of their individual shareholders at very low level and tried to resolve the problems of such investors. A majority of these companies have been able to keep complaints much below a level of one thousand and wherever these complaints have shown some signs of moving up, the subsequent years have been utilised to plug the problem. Tax compliance also appears to be reasonably controlled; of course it is much better in case of companies in the service industry such as Infosys, Wipro, and Reliance Communications. Companies based on heavy industries have comparatively more tax related issues with the government. The extent and nature of taxes being levied may be important reasons behind pending volume of taxes against a company. 10 Manoj Kumar Agarwal & V.K.Malhotra

In finance-related corporate governance facets, the companies that have got an index score of more than fifty per cent include Infosys, Sun Pharmaceuticals, Wipro, and Tata Steel. Bharti Airtel has also got an index score of more than the average of all. Out of these five, three companies, namely, Infosys, Wipro, and Bharti Airtel belong to service sector. The companies from the bottom end on this count include Hindalco, Larsen & Toubro, Reliance Industries, Tata Motors, and Reliance Communications. These companies except Reliance Communications belong to the industry types that generally have higher capital-output ratios. Another observable thing about all of these companies is that their finance-related index scores show a decline ever since the global slowdown has started to have its effects on the financial performance of the companies. Since all of these companies are highly linked with the global trade, the global recession has left its reflections on the profitability of India’s corporate sector, including these majors. When relationship between Ownership pattern and corporate governance is seen by major categories of shareholders, we get the following correlation coefficients: Correlation between Shareholding Pattern by Major Categories and Corporate Governance Shareholding

Non-

Institutional Institutional Governance Parameters Promoters Investors Investors Board-related -0.282 0.5221 0.4191 CAT -0.215 0.1717 0.1422 Finance-related 0.1583 -0.101 -0.444 Composite CG -0.076 0.2009 -0.119

The relationship between ownership pattern and corporate governance by sub-categories provides the following correlation coefficients: Correlation between Shareholding Pattern by Sub-Categories and Corporate Governance Shareholding

Banks, Mutual Financial Indian Funds Institutions Private

Promoter and , Insurance Corporat Individual Governance Parameters s UTI Companies FIIs e Bodies s etc. Board-related -0.278 0.3198 0.5584 0.1664 0.3113 0.369 CAT -0.218 0.1424 -0.081 0.2489 -0.038 0.1713 Finance-related 0.1123 -0.298 -0.45 0.3421 -0.383 -0.383 Composite CG -0.111 -0.04 -0.193 0.4588 -0.208 -0.074 Corporate Governance 11

In this way it could be noticed that correlation coefficient between Promoter and Promoters Group and Board-related Corporate Governance is (-) 0.282 and between Promoters and Promoters Group, and CAT-related Corporate governance is (-) 0.215, which implies that share of this category of ownership is negatively related to these aspects of governance and the two are varying in opposite directions. The companies having a high concentration of Promoters and Promoter Group in equity holding may not exhibit much interest in board size or board meetings. This can be easily observed in case of Reliance Communications, Wipro, and Sun Pharmaceuticals. On the contrary, Larsen & Toubro which has hardly any significant holding of Promoters and Promoter Group has a large sized board and conducts a good frequency of board meetings. Infosys, having around 20 per cent of this category’s holding, has again large size of the board standing at 15-16, though it has 5 to 8 board meetings in a year. All these companies except Bharti Airtel have Promoters and Promoter Group being chiefly constituted by Indian promoters only. Hence, nearly the same degree of correlation is observed when the situation is viewed in terms of the sub-category of Indian Promoters. Institutional Investors comprising of Mutual Funds and UTI, Banks, Financial Institutions and Insurance Companies, and Foreign Institutional Investors have maximum correlation coefficient (0.522) with Board-related governance indicators as compared to CAT-related (0.17) or Finance-related (-0.101) indicators of corporate governance. This relationship is reinforced by correlation coefficients considered by sub-categories. Mutual Funds and UTI have correlation coefficients at 0.32 with Board-related indicators, 0.14 with CAT- related indicators and (-) 0.30 with finance-related governance indicators. Banks, financial institutions and insurance companies have these correlation coefficients at 0.56 with Board-related indicators and (-) 0.45 with finance-related constituents of corporate governance. Foreign Institutional Investors have a low degree of correlation (0.166) with Board-related indicators and 0.25 with CAT-related indicators; while their correlation with Finance-related indicators is 0.34. Their correlation with the Composite Corporate Governance stands at 0.46 which is indicative of almost fifty per cent degree of covariance in the same direction between the two. Larsen & Toubro, Infosys, and Tata Steel are the companies that rank at the top in board-related governance index and these companies have a high stake of institutional investors in the equity, while Wipro and Reliance Communications that have a low share of institutional investors have not performed well on the same indicator and are ranked towards the bottom. Banks, financial institutions and insurance companies have quite high holding in Larsen & Toubro and Tata Steel while foreign institutional investors have a very high share in the equity capital of Infosys (45%). Non-institutional investors have a reasonably good positive correlation coefficient (0.42) with Board-related corporate governance and negative correlation coefficient (- 0.44) with Finance-related corporate governance. With CAT-related governance its correlation coefficient has a small value (0.14). The Non-institutional Investors have a low degree of correlation with Composite Corporate Governance Index scores. Since the share of Non- institutional Investors has been shrinking in most of these companies, they may not force their concerns about corporate governance aspects in a mighty manner. Conclusion The study explicitly shows that the ownership pattern in the major corporate entities of India has moved towards concentration in favour of Promoter & Promoter Group and the overall share of Institutional Investors has also increased, while within this major category of Institutional Investors the equity holding of mutual funds and Unit Trust of India has fallen in most of the studied companies. Among institutional investors, banks, financial institutions and insurance companies as a sub-category have either maintained 12 Manoj Kumar Agarwal & V.K.Malhotra their share or have scaled it up. They have kept their share intact where it existed at high level and ascended further in other instances. Financial institutions have risen in their share at a rapid rate and most of these firms have attracted foreign institutional investors. Among the non-institutional investors category, the share of Private Corporate Bodies has largely remained below one-twentieth of the equity. The share of individual investors has been shrinking in most of these companies while its pace has differed from being moderate to very high. The companies which have high stakes of Promoters and Promoter Group have exhibited lesser interest in board-related aspects of corporate governance while institutions and individual investors pay more importance to this aspect. Since in this work the companies studied are India’s largest ones, these companies have paid attention to the complaints of individual shareholders, minded audit fee and made efforts to keep tax related disputes at relative low. However, finance related facets of corporate governance need greater attention by Indian corporate sector. Greater volume of equity investment by foreign institutional investors is expected to bring about changes in finance-related aspects of corporate governance in Indian companies. There is no denial to the fact that finance related performance depends on industry type and in this study it has been noticed that service sector companies have reasons to have greater profitability than manufacturing companies. But a comparison among them could establish the efficiency differences within a particular industry type. The international scenario affects firms in a rapidly globalising business environment, which is manifested in different aspects of corporate governance as well. These effects could be noticed in Indian corporate sector too. While foreign institutional investors influence the finance-related and other aspects of corporate governance in a positive and additive manner, the global recession starting from 2007-08 has adversely affected the financial performance of Indian companies that have reasonable presence in global market. Besides, companies in India still need to align different aspects of corporate governance and raise the level of corporate governance in all major aspects appreciating that achievement in one aspect cannot be considered as contradictory to the other ones. *** V.K.Malhotra, Associate Professor, Department of Economics, C.C.S.University, Meerut (250004) U.P., India. e-mail ID – [email protected] Manoj Kumar Agarwal, Assistant Professor, Department of Commerce, Meerut College, Meerut (250001) U.P., India. e-mail ID – [email protected]

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