The Indian corporate sector has undergone considerable change during trade liberalization, deregulation and globalization. However, minority shareholders still remain uncomfortable. This is because the family firms in India work in pyramid structure and exploit the shareholders through transaction juggleries; MNCs are subjected to severe agency problems. This article addresses both these issues and raises a question about the fate of corporate form in India. General idea of an optimist about the Indian Corporate Sector is that it has undergone significant changes in last decade. They feel that long financial reforms and economic restructuring has brought the Indian Corporate Sector out of its pragmatic view and traditional dominance of powerful family business enterprises. Liberalization, Privatization and Globalization (LPG) put enormous competitive pressure on Indian Companies which led to a change in financial landscapes. This situation apparently may lead to a conclusion that Indian Corporate Sector will be stronger and have a long life. A deeper and wiser look into it will say contrary-the corporate form in India is going to be over in due course (Anderson, 2003).
Basic questions about the position of Indian Corporate today is-what is the prospect of such Indian business model and what are the threats that may cause the obsolescence of Corporate form from India? This question can be addressed if we closely look some other questions and examine its strengths and weaknesses. These questions include: Development strategy, adopted by India before reform mainly conceptualized in import substituting industrialization (Reed, 2002) and export-led industrialization. This strategy focused on production for domestic market, interventionist industrial policy and channeling investment into key sector through supply of cheap credit by government development bank, licensing system etc. However, the adoption and growth if this model in the post-colonial period seems to have been driven by the desire to rapidly increase industrial capacity. This has helped Indian family enterprises to flourish and grow more at the strength of government policy than their own. For these family-owned firms, the earning was easy and siphoning was easier. They not only enjoyed the captive market but also received extensive subsidies in the form of credit and infrastructure.
There was no scope for shareholders to influence the company decision and they had no other option but to play the role of a passive spectator. This resulted in inefficiency and more specifically lack of accountability for loan repayment, corruption and exploitation of shareholders. This has made the Indian corporation earn high profit despite poor macroeconomic growth of the country. Whereas in East Asia, the corporation typically earned low profit in spite of higher level of microeconomic growth and had an ability to compete in international market (Mukherjee and Reed, 2001). India, as Mukherjee-Reed recounts in her paper, family-controlled business houses were able to build extensive empires ranging across numerous economic sectors. They were able to maintain control over their vast holding with a relatively small ownership stake through the use of inter-locking directorates and inter-corporate investments. Their ability to maintain control (and ignore the interests of minority shareholders) was further enhanced by their reliance on debt finance, the weak state of the financial markets and an ineffective legal system. |
