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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,

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