FOREIGN OWNERSHIP AND CORPORATE GOVERNANCE PRACTICES: A STUDY OF SELECT INDIAN COMPANIES

Abstract

The concept of Corporate Governance (CG) involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. It encompasses within itself: Transparency, Disclosure, Fairness, Accountability and Responsibility. This thesis adopts the stakeholder value focus of CG in which “CG deals with mechanisms by which stakeholders of a corporation exercise control over corporate insiders and management such that their interests are protected. The stakeholders of a corporation include equity holders, creditors and other claimants who supply capital, as well as other stakeholders such as employees, consumers, suppliers, and the government” (John and Senbet, 1998). It is widely argued that foreign investment is a mechanism for improving CG in emerging markets and the form of foreign investment matters. Foreign capital inflows need well developed capital markets, sound legislative, regulatory and structural reforms and most importantly strong CG infrastructure. An examination of the same especially those concerning ownership structures and performance could yield important insights into the topic and provide a fresh perspective on what has become an increasingly international debate. In the light of the above, the present study explores the structure and trend of foreign equity shareholdings in the sample companies for a nine year period (2008-2016). Foreign capital inflows are dependent upon financial and non-financial considerations which include return on investment, macroeconomic policy framework, investment climate and infrastructure in the host country. Further, such investments require broader and deeper financial markets with strong investor protection, market discipline and market transparency. The investments by foreign investors in the equity of a company would be based on their own firm specific risk and reward assessments as well as various firm specific financial characteristics namely, value, performance, profitability to name a few. The present study is an attempt to address and examine whether there exists a relationship between foreign equity shareholdings and firm characteristics in the Indian context. Further, the study is taken up to assess the

stakeholders’ perception towards current corporate governance regime and identify the related issues, barriers and challenges for improvements in future. For the purpose of the study both secondary and primary data sources are used. The study employs various statistical techniques on a sample of 449 non-financial companies selected from S&P BSE 500 and NSE NIFTY 500 indices of India over the period 2008-2016. The data is analyzed using SPSS (version 22), STATA (version 13) and Eviews8. The analysis elucidates the motivation for shareholder activism, management responsibility and regulators enforcement. The empirical findings put forth by the study highlights the role of foreign investors in enhancing CG practices in emerging market economies. Further, the study has reinstated the importance of activism of foreign shareholders that will lead to emergence of a more activist engagement for the long term benefit of both investors and investees. Consequently, Indian policy makers must permit more and more foreign investment and let India procure the entire performance benefits of ownership of foreign investors. The study enhances knowledge of the firm’s financial characteristics that influence foreign capital inflows which in turn would help Indian firms to act accordingly and tap more and more foreign capital. Thus, the thesis adds to the CG literature which can be beneficial to governance practitioners, policy makers, regulators, stock exchanges, think tanks, investors, corporates as well as researchers.