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Creating a Corporate Advantage: The Case of the Tata Group

The Tata group is among the largest diversified business groups in India. The case describes in detail the various mechanisms by which the Tata group attempts to create a corporate or parenting advantage.

IT-Led Business Transformation at Reliance Energy

The case illustrates how Reliance Energy leveraged technology to transform its strategy and operations in order to establish international standards of operational excellence and customer service in the Indian power sector

Balancing the Power Equation: Suzlon Energy Limited

The setting for the case is the global wind power industry, an emerging high-tech industry. The case thus shows that EMNEs are entering and succeeding not only in mature industries but also in newly emerging industries.

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Converting Adversity into An Advantage - Chiranjeev Restaurants and Foods

Set in January 2020, this case explores the journey of Praful Chandawarkar, the founder director of Chiranjeev Restaurants and Foods Private Limited, and his core team as they transform their business. After a successful career as an investment banker, Chandawarkar, and his wife, Cheeru, a highly talented chef, decided to pursue their passion and embark on the journey of entrepreneurship. In 1997, they established Malaka Spice, a restaurant specializing in Southeast Asian cuisine, in Pune. Over the course of a decade, they expanded rapidly across multiple cities in India. However, Chandawarkar confronted a personal tragedy when his wife succumbed to cancer. This loss made him take a step back to reflect and reevaluate his approach, crystallizing his personal belief that the primary purpose of an enterprise must be the well-being of people. He realized that he needed not only personal transformation as a leader but also a shift in his approach. Seeking the guidance of a leadership coach, he underwent a personal transformation and introduced new work practices to enhance both employee and organizational performance. He placed a strong emphasis on collective well-being and introduced business practices aimed at enhancing the well-being of all stakeholders, both within and outside the organization. The case presents the story of how Chandawarkar and his team changed their approach and work practices, which led to significant changes such as diversification of the group and accelerated growth. The case concludes with the challenge faced by the organization, especially within the context of the hospitality industry, as the threat of lockdowns during the COVID-19 pandemic looms large.

Learning Objectives

• Understand the challenges faced by an entrepreneur in scaling the business and modifying practices to manage the business effectively
• Recognize how self-awareness help leaders change their leadership style and work methods
• Learn how the organization used practices based on the Arthashastra for effective organizational functioning
• Understand the entrepreneurial mindset and how it helps in managing the business effectively
• Understand the leadership mindset of collective well-being

Aadhaar: The Digital Multiplier of the Indian Economy

Panchkula Information Technology Park

Organo: Scaling Sustainable Eco-Habitats

Fostering Universal Access to Education in India through the Common Services Centres (CSC) Academy

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Article Contents

1. introduction, 2. challenges to theorising financialisation and applying it to developing countries, 3. financialisation in the indian telecommunication sector, 4. particularities of financialisation in india, 5. conclusion, conflict of interest statement, bibliography.

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The Indian road to financialisation: a case study of the Indian telecommunication sector

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Jai Bhatia, The Indian road to financialisation: a case study of the Indian telecommunication sector, Cambridge Journal of Economics , Volume 46, Issue 5, September 2022, Pages 1025–1044, https://doi.org/10.1093/cje/beac039

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This article provides an empirically grounded study of financialisation in India and assesses the challenges of theorising financialisation and applying it to developing countries. Drawing on the case study of the Indian telecommunication (telecom) sector, this article then contrasts the characteristics of financialisation in India with those in other developing countries. Using the case study, the key institutions, policies and practices that produce and reproduce financial accumulation in this sector are mapped, detailing how the primary role of finance in the telecom sector has changed from facilitating business to making telecom companies investable financial assets that could be bought and sold for profit. The article shows how the uniqueness of India’s financial system leads to a structure where the state, the public sector banks, the big businesses and the financial markets together play a key role in producing and reproducing financialisation in India.

Finance and financial practices have become increasingly significant to capital accumulation in developing countries ( Karwowski and Stockhammer, 2017 ). There is growing literature on these practices under the discussion of financialisation ( Lapavitsas, 2009 ; Painceira and Kaltenbrunner, 2009 ; Becker et al., 2010 ; Bonizzi, 2013 ; Powell, 2013 ; Jayadev et al., 2018 , among others). This article examines the modalities of financialisation in India through the case study of the telecom sector. This sectoral study helps illustrate the unique features of financialisation in India and contrasts it to those in other developing countries.

Financialisation is a conceptually complex and contested phenomenon ( Aglietta, 2000 ; Boyer, 2000a ; Epstein, 2005 ; Orhangazi, 2008 ; Krippner, 2011 ; Lapavitsas, 2011 ; Sawyer, 2013 ; Fine and Saad-Filho, 2017 ). It is associated with a range of meanings, methods and theories focussing on ‘the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies’ ( Epstein, 2005 , p. 3). This article adopts Krippner’s general definition of financialisation as ‘a pattern of accumulation, in which profits accrue primarily through financial channels rather than through trade and commodity production’ ( 2011 , p. 174). Drawing upon this definition, the article shows how the role and the function of finance in India changed after the neoliberal reforms of the 1990s.

Telecommunication is one of India’s most successful sectors: starting from a backlog of under-provision and poor services, mobile telephony has boomed since it was opened up to private investment in 1994, and currently provides efficient services to the vast majority of Indians at affordable rates. Using the Indian telecom sector as a case study, this article demonstrates how the function of finance changed rapidly, from facilitating business operations to making telecom companies investable financial assets that could be bought and sold for profit. This sector was chosen for three main reasons: first, its oligopolistic market structure provided insight into how big private businesses, with their substantial financial resources and political and economic networks interacted with each other and the various business practices they undertook to maximise the value of their telecom companies. Second, the telecoms sector is regulation-driven, as spectrum rights which are at the heart of the telecommunications service provision are both created and regulated by the state. The state and business must constantly interact, as the state is deeply involved at every level, in the production, financing, distribution and consumption of the telecommunications services in India. Such interactions provided an excellent opportunity to study the role that the state played in driving, underwriting and managing the process of financialisation. Finally, the telecom sector in India was developed and financialised over a relatively short period from 1994 onwards and the developments in the sector are remarkably well documented. This article aims to contribute to the literature of financialisation in developing countries and more specifically, on India as there is no systematic empirical study of how (if at all) the process of financialisation has evolved in India, and there are no sectoral studies of financialisation in specific industries.

After this introduction, this article examines the challenges to theorising financialisation and applying it to developing countries. Then it provides an empirical analysis of the Indian telecom sector (between 1994 and 2019) and details how the process of financialisation takes place. Finally, the article compares the features and trends of financialisation in India to those in developing countries before concluding.

Financialisation is complex and a contested phenomenon, with a wide range of meanings associated with it across an expanding spectrum of literatures, for example, financialisation can be understood through various perspectives including those of the Monthly Review School ( Sweezy, 1997 ), regulation school theorists ( Aglietta, 2000 ; Boyer, 2000a ; Clark, 2009 ), post-Keynesian scholars ( Stockhammer, 2004 ; Epstein, 2005 ; Orhangazi, 2008 ) and Marxist scholars ( Lapavitsas, 2011 ; Fine, 2013 ; Saad-Filho, 2021 ). The literature on financialisation lacks consensus: many aspects of financialisation, including the extent to which it has taken root in society, its historical evolution, its future manifestations and implications for economic and social reproduction have all been debated and contested by scholars ( Saad-Filho, 2021 ).

The term financialisation can be at least traced back to Magdoff and Sweezy (1987) , who drew on the works of Baran and Sweezy (1966) to argue that monopolies tend to expand productive capacity, which often results in over-production, a surplus that is not absorbed by the market and leads to a decline in the monopolies’ profits ( Arrighi, 1994 ; Sweezy, 1997 ; Lapavitsas, 2011 ). Regulation school theorists such as Aglietta (2000) , Boyer (2000b) and Clark (2009) describe the new regime of accumulation, which is regulated by the logic of financial markets, where companies that create more value for their owners are instantly rewarded with a higher price for their shares on the stock exchange, making them more valuable. Post-Keynesian scholars such as Epstein (2005) , Orhangazi (2008) and Stockhammer (2004) examine the implications of financialisation when understood as the re-emergence of the rentier that extracts profit because of the scarcity of capital and not from the increase in profits from productive activity ( Orhangazi, 2008 ). Marxist scholars such as Fine and Saad-Filho (2017) argue that financialisation, a core feature of the neoliberalism phase of capitalism, can be seen as the prevalence and proliferation of interest-bearing capital (IBC), which restructures the process of accumulation of capital in favour of financial activity. This in turn leads to a redistribution of surplus value as interest.

Fine (2013) argues that there are two ways for IBC to expand: ‘intensively’ or ‘extensively’ as finance has penetrated in economic, social and political life. Intensive expansion of IBC involves, for example, the securitisation of debt, which may lead to speculative booms and crashes like the 2008 financial crisis, in which speculation on the US housing market through excessive trading of debt (interest-bearing) instruments such as mortgage-backed securities, collateralised debt obligations (CDOs) and credit default swaps (CDS) resulted in a global economic meltdown ( Fine, 2013 ). IBC can also expand ‘extensively’, permeating new areas of economic and social life as seen from the increasing corporatisation, commodification and privatisation of goods and services. This is observed especially in the areas of public provision such as healthcare and education, which are now subject to the commercial principles of cost–benefit analysis instead of the original welfare-oriented objectives ( Leys, 2001 ; Fine, 2013 ; Saad-Filho, 2021 ).

The concept has been increasingly extended to developing countries ( Lapavitsas, 2009 ; Bonizzi, 2013 ; Karwowski and Stockhammer, 2017 ; Jayadev et al., 2018 ). However, when building an understanding of financialisation and its features in developing countries, there are a host of problems associated with the methods and theories developed to understand and examine financialisation. A key problem is that studies and, therefore, the definition of financialisation originally focussed on the Anglo-American economies. Variations among developing countries arise from their political, economic, social, historical and institutional differences and the modality of their global integration ( Ashman and Fine, 2013 ). For example, Lapavitsas (2009) and Painceira and Kaltenbrunner (2009) examine the role that global factors play in the rise of financialisation in developing countries through the rise of the US dollar as a quasi-world currency, which Powell (2013) states is a key factor shaping the subordinate character of financialisation in developing countries.

The studies of financialisation that have focussed on Anglo-American financial markets assume the sources of capital (debt and equity) to be market-based and capital markets to be fully functioning. In contrast, such market dynamics are often absent in developing countries ( Bonizzi, 2013 ). More specifically, in India, financial markets are relatively underdeveloped in comparison to developed economies’ markets, in terms of volume of trading, liquidity, regulations surrounding transparency, implementation of regulations and punitive action against violation of the law ( Das and Ghosh, 2009 ; Chandrasekhar, 2012 ; Sen and Das Gupta, 2015 ). In addition, one of the leading sources of capital in India is debt from public sector banks, which are often not subject to the vagaries of the financial markets but tend to be state-controlled ( Government of India, 2018a ). Such differences in the sources of capital and the less developed nature of financial markets necessitate a precise and appropriate understanding of financialisation that allows for the analysis of developing countries with their unique characteristics, institutional structures, political histories, economic policies and practices ( Kaltenbrunner and Karacimen, 2016 ).

Empirical studies on the financialisation of the Indian economy are scarce. Mishra et al. (2014) and Trivedi (2014) engage in a firm-level empirical study of Indian companies and argue that they increasingly use financial instruments to enhance profitability. Sen and Das Gupta (2015) study the incentives provided to corporate managers to invest larger sums in financial assets and find Indian corporates tend to hold financial assets as a rising proportion of their portfolio. There is no systematic empirical study of how (if at all) the process of financialisation has evolved in India. This article aims to fill that gap through a close examination of the process of financialisation in India using the lens of the telecom sector.

The growth of the telecom sector is among India’s most remarkable economic achievements and is often cited as an example to justify the economic reforms of the 1990s ( Athreya, 1996 ; Sinha, 1996 ; Sridhar, 2011 ; TRAI, 2018a ). It is touted as one of India’s most successful sectors for its booming spectrum markets, its market-driven policy initiatives and for how the industry has come to provide telecom services to much of the population at affordable rates. The subscriber base of wireless telephony increased from 5 million in March 1991 to 1.17 billion subscribers in June 2019 ( TRAI, 2019b ) and the cost of services fell by 98.3% from Indian Rupee (INR) 6 per min in 2001 to INR0.10 per min in 2019 ( The Economic Times, 2015 ; Kaushik, 2019 ).

Crucial to the telecom sector is the usage of spectrum (bands of electromagnetic waves), which is regulated by the state and necessary to provide mobile telephony services, making the rights to use spectrum (spectrum licences) highly valuable. The state auctions spectrum licences to telecom companies for defined periods of time (usually 20 years), in return for non-tax revenues. For the telecom businesses, the allocation of spectrum is one of the most important transactions: it is access to spectrum that gives businesses the ability to provide and expand their telecom services. Telecom companies require a range of frequency bands to cater to their 2G, 3G and 4G customers.

Telecom businesses borrow money primarily from public sector banks 1 to fund their bids for spectrum ( Bhatia, 2019 ). When market conditions are good, telecom businesses bid more aggressively in spectrum auctions, adding more to the state’s coffers. The spectrum licences act as valuable assets that increase the financial valuations of telecom companies, enabling them to borrow more from public-sector banks to further participate in subsequent rounds of spectrum auctions. As a result, the wealth of the promoters of the telecom companies, who are the group of shareholders involved in the management of the business, also increases as financial valuations of their equity stakes increase. However, when economic conditions deteriorate, 2 telecom companies find it more difficult to repay their loans as their financial valuations fall.

Interestingly, various state institutions often intervene with a variety of measures to revive the sector, from changing telecom policies in order to help telecom companies, to forgiving loans of troubled companies ( Bhatia, 2019 ). Public-sector banks therefore bear the burden of significant business risks in the telecom sector, while the promoters, henceforth called owners of telecom companies, enjoy the upside returns. This asymmetric risk-return dynamic makes telecom companies very attractive financial assets. The telecom companies are bought and sold as financial assets for capital gains, where gains to shareholders tend not to come from the business of providing telecom services but, instead, from their higher valuations through financial practices such as mergers and acquisitions (M&A), spin-offs, public offerings and attracting private equity investments at favourable prices for its owners, pointing to financialised accumulation in the sector. This process of financial accumulation describes how financialisation occurs in the telecom sector.

Figure 1 depicts the process of financialisation in the Indian telecom sector, which can be broken down into two accumulation processes: first, bank credit-led accumulation which describes how telecom companies borrow money primarily from public-sector banks to fund their operations and to acquire spectrum licences from the state. In practice, the highly leveraged position of the telecom companies transfers the risk of the business to the public-sector banks, making those companies attractive financial investments. Second, financial valuation-led accumulation describes how telecom companies are valued and traded as financial assets to generate capital gains for its owners. Both these processes together create the modalities of financialisation in India.

The process of financialisation in the Indian Telecom Sector.

The next subsection details the two parts of the process of financialisation of the sector: bank credit-led accumulation followed by financial valuation-led accumulation .

3.1 Bank credit-led accumulation

Bank credit-led accumulation details how telecom companies become attractive financial assets that are bought and sold for profit by their owners. It describes each of the core institutions: the state, private telecom companies and public sector banks, their symbiotic relations (as shown in Figure 2 ) and their self-interest in promoting bank credit-led accumulation, and how these institutions together lay the foundations of financialisation in the telecom sector.

Bank credit-led accumulation.

3.1.1 The state

The state and its institutions have a keen self-interest in supporting the process of financialisation of the telecom sector, which is a significant source of non-tax revenue for the state. On average, the telecom sector generated 24.1% of all non-tax revenues between 2009 and 2017 ( Government of India, 2018b ). These revenues include licence fees, spectrum usage charges, spectrum upfront auction payments, spectrum auction instalment payments and other fees.

3.1.2 Private telecom companies

The market structure of the telecoms sector is oligopolistic as the three private sector companies 3 have significant market share based on the total number of subscribers. Reliance Jio (controlled by Reliance Industries Ltd, one of India’s largest conglomerates) has 31.65% market share; Vodafone Idea, formed by the merger of Vodafone India, a wholly owned subsidiary of the UK-based telecom company Vodafone Inc. and Idea Cellular, a part of the Aditya Birla Group, one of India’s largest conglomerates, has 28.40%; and Bharti Airtel, part of the Bharti Group, a large conglomerate, has 28.28%—altogether they control 88.33% of the wireless telephony market ( TRAI, 2019a ). The state-owned telecom companies include Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) have a joint market share of 11.67% ( TRAI, 2019a ).

Although the telecom sector has experienced exponential growth ( Sridhar, 2011 ; TRAI, 2012 ; Baijal, 2016 ; Government of India, 2017 ), the business of providing telecom services has been under pressure from falling average revenue per user (ARPU, a key measure of profitability), increasing spectrum auction payments to the state, and rising operational and network costs resulting in declining earnings. For example, capital expenditure (which includes the costs of upgrading technologies and acquiring newer bands of spectrum) increased 2.9-fold between 2012 and 2016. Figure 3 shows a consistent fall in ARPU between 2000 and 2018.

Average revenue per user (ARPU) 2000–18.

Source : TRAI 2018b , 2019a , 2019b .

Most telecom companies funded their business primarily using bank debt and over time found themselves overleveraged and burdened with large interest payments. Bank debt tends to be the cheapest form of capital, especially for large conglomerates as they have long-standing relations with banks across their various business portfolios and a substantial asset base, indicating lower risk which helps them get lower interest rates.

Loans from public sector banks make up a substantial percentage of debt ( TRAI, 2016 ). Figure 4 shows an increase in short-term and long-term debt of telecom companies between 2007 and 2015.

Increase in total debt of telecom companies 2007–15.

Source : TRAI, 2013 , 2016 .

Figure 5 shows how the debt of telecom companies increased significantly over time in comparison to their share capital, indicating that most capital needs were fulfilled by taking on increasing levels of debt.

Capital structure of telecom companies 2007–15.

The increasing levels of debt are also evidenced by the worsening debt-equity ratio from 1.08 to 2.33 between 2007 and 2016 and by the fall in interest-coverage ratio 4 from 4.1 to 1.8 between 2007 and 2015 indicating the sector’s inability to repay or service its debts ( TRAI, 2013, 2016 ). For example, between 2016 and 2018, many now defunct telecom companies witnessed a dwindling of their profits. Forced by high levels of debt, Reliance Communication defaulted on a debt of INR46,000 crore (US$6.6 billion), Aircel defaulted on a debt of INR23,000 crore (US$3.2 billion) and Tata Teleservices defaulted on INR30,000 crore (US$4.2 billion) ( Reuters, 2017 ). Subsequently, Reliance Communications and Aircel filed for bankruptcy, while Tata Communications was acquired by Bharti Airtel ( The Economic Times, 2019 ).

The ability of the telecom companies to present themselves as low risk and, thus, take on high levels of debt implies that these companies are effectively transferring the risk of large business losses to the banks. It is important to note the distinction between telecom companies and their owners. The owners of these companies have historically always made profits even when their businesses themselves have not. The indebtedness of their companies allows the owners to effectively transfer risk to the banks, where banks are left with unpaid debts with little or no consequences for the owners. Owners of telecom companies often make profits in a variety of ways, such as selling a stake of the company to a foreign investor, and through M&A activities (as detailed in the next section). The telecom companies become conduits for the business owners to produce and reproduce their wealth through financial means. Yet, in the context of both risks being transferred to banks and companies showing a lack of profitability, the question that emerges is why banks lend to the telecom companies in the first place. This is explained in the next section.

3.1.3 Public sector banks

In India, the banking sector is dominated by public sector banks, which are state-owned or controlled and very often not subjected to the vagaries of the market. The public sector banks’ share of the total outstanding credit of the banking sector is 66.7%, while private sector banks’ share is 28.7% and foreign banks’ is 4.6% as of June 2017 ( RBI, 2017a ).

As mentioned before, despite the poor financial performance of telecom companies, public sector banks are willing to lend to the telecom companies because telecom companies are seen to be commercially less risky as they have a large asset base, which they can borrow against and have long-standing relations with banks. Spectrum licences are highly valued assets, which makes for a good collateral. Generally, banks are more willing to advance more loans to these businesses if the value of the collateralised assets (spectrum, shares of telecom companies, etc.) increases. Bankers lend to telecom companies that belong to larger conglomerates even more readily and at favourable terms as they are considered attractive borrowers since they borrow larger amounts. Moreover, lending to big businesses makes it easier for bankers to meet performance targets, which are linked to an incentive system that allows them to earn more and be considered for promotions sooner. Banks also tend to lend in consortia, which allows them to spread the risk of large loans among participating banks.

It is a win-win situation for the public sector banks, the state and telecom businesses. As long as the market conditions are good and the value of collateral (spectrum licences and share price of telecom companies) increases, the state earns non-tax revenue from allocating spectrum to telecom companies, the telecom companies get access to cheap credit from public sector banks to acquire licences for newer bands of spectrum which increases their financial valuations. However, when market conditions deteriorate, telecom companies cannot make interest payments or repay their loans and financial valuations fall and make it harder for the telecom companies to access credit. The state then steps in and changes telecom policies to ease financial pressure on the telecom companies (as detailed in the next section), waives interest and allows public sector banks to write-off debts of troubled companies. As a result, public sector banks have growing portfolios of non-performing assets (NPAs), and when the NPAs reach a critical level, the state recapitalises the banks. It can be argued that the public-sector banks take on a significant proportion of the downside business risks in the telecom sector, while the owners of telecom companies are able to capture all the upside returns, which makes telecom companies very attractive financial investments. The next section details how these telecom companies aim at higher valuations through financial practices such as M&As, corporate restructuring and spin-offs, share buybacks and IPO, to generate financial profit, which leads to the discussion of the second part of the financialisation process in India.

3.2 Financial valuation-led accumulation

Financial valuation-led accumulation is the second part in the process of how financialisation occurs in India in the telecom sector. Financial valuation-led accumulation is a type of financial accumulation that can be understood as increasing financial returns arising from increasing asset prices. In this part, the gains to shareholders tend not to come from the business of providing telecom services but instead from the increase in financial valuations of telecom companies. Financial valuations are the monetary value of a company at which it can be merged, acquired or sold. Owners of telecom companies are rewarded with capital gains or an increase in the financial valuation of their asset, which usually depends on the ‘expected’ profitability of the underlying business and the expected increase in value of its assets such as spectrum licences.

To this end, this subsection first describes the financial practices such as M&As, corporate restructuring and spin-offs, share buybacks and IPOs, that telecom companies engage in to enhance their financial valuations and create financial gains for its owners. Second, this section also describes the state’s efforts to ensure that financial valuations of telecom companies increase through repeated changes in policy in favour of businesses, indicating how the process of financialisation is implicitly supported by the state.

Many telecom companies engage in financial practices that allow them to inflate their financial valuations to maximise the financial gains for their owners. Financial valuations are considered to have ‘notional value’ when calculated, but after an arm’s length transaction is conducted using a valuation, it is considered to have ‘real value’ ( Damodaran, 2011 ; Brealey et al., 2016 ). Once the notional value is converted to a real (or actual transacted) value, the valuation is used for various purposes including calculations of capital gains tax, collateral for a loan, sale of the company’s shares, and so on (ibid.). As the valuations increase, the owner could sell a stake in his/her company at a higher price which creates significant financial gains for the owners.

For example, in 2016, although Reliance Jio starting a price war that increased the industry’s losses so significantly that many telecom companies (most notably, Reliance Communications, Tata Teleservices, etc) had to declare bankruptcy or merge (Vodafone and Idea Cellular) to survive, the financial valuations of the surviving companies increased substantially as seen in the case of Reliance Jio and their ability to attract investment at very high valuations from foreign companies, despite their significant losses. Facebook acquired 9.99% of its stock for US$5.7 billion, Google 7.7% of its stock for US$4.5 billion, Silver Lake 2.1% of its stock for US$1.3 billion, Vista 2.3% of its stock for US$1.5 billion, KKR 2.3% of its stock for US$1.5 billion among many others ( Bhatia and Harris-White, 2020 ; McGregor, 2020 ). These deals meant that Reliance Jio’s financial valuation is now in excess of US$100 billion. Having invested INR1,50,000 crores (US$19 billion), the Ambanis were able to increase their financial returns over fivefold in under 4 years purely based on financial valuations rather than profitability ( Bhatia and Harris-White, 2020 ).

3.2.1 Mergers and acquisitions

The first financial practice to be discussed in the Indian context is mergers and acquisitions. Historically, telecom regulations restricted foreign companies from directly participating in spectrum licence auctions, but instead, they were able to invest in Indian companies that had been allotted spectrum licences. So, many Indian telecom companies that had won spectrum licences in auctions found that foreign companies were willing to pay a premium to own a part of them. Many telecom companies have sold major and minor stakes to foreign companies and to financial investors for a hefty premium. As early as 1998, Max India owner, Analjit Singh had successfully sold 41% of his telecom business to Hutchison Max (later Vodafone Essar), for INR561 crore (US$142 million) ( The Economic Times, 2012 ). This deal changed the public perception of the telecom sector and made it one of India’s most attractive sectors for foreign investment.

M&A activity increased after the 1999 New Telecom Policy (NTP) that allowed companies to switch from a fixed licence fee regime to a revenue-sharing regime, which attracted foreign investments such as Warburg Pincus’ and British Telecom’s investment in the Bharti Group ( Thakurta, 2016b ). With the support of foreign investment, the Bharti Group began acquiring stakes in smaller Indian telecom companies such as JT Mobile, Skycell and Spice Telecom Kolkata. The Tata and the Birla Groups, along with the American telecom giant AT&T, formed BATATA, which also began acquiring stakes in smaller telecom companies (Sridhar and Sridhar, 2006 ).

The increase of M&A after 1999 is marked by two events. Since 2006 there has been a significant increase in M&A transaction values, and since 2008 a significant increase in financial valuations of telecom companies. The first event is the result of many foreign companies such as the UAE’s Etisalat, Russia’s Sistema, Norway’s Uninor, Malaysia’s Maxis Group and Singapore’s Sing Tel acquiring stakes in Indian telecom companies at hefty premiums ( Sridhar, 2011 ). Additionally, Idea Cellular acquired Tata’s 48.18% stake in their joint venture for US$692 million with the help of Malaysia-based private equity group Axiata. Another Malaysian Group, Maxis Telecom acquired 74% stake in Aircel for US$1.08 billion in 2006 ( TRAI, 2012 ; Government of India, 2018b ; Telecom Lead, 2018 ). In 2007, Vodafone and Hutchison Essar merged after Vodafone agreed to a buy controlling stake of 67% for $11.1 billion ( Sridhar, 2011 ). The second event is a result of a significant increase in financial valuations exemplified by: the Japanese cellular operator NTT DoCoMo purchase of a 26% stake in Tata Teleservices for US$2.7 billion; the UAE-based telecom company Etisalat purchasing a 45% stake in Swan Telecom for $900 million and also Idea Cellular, who acquired an 80% stake in Spice Telecom, a Mumbai-based telecom operator for US$425 million ( Kerr and Fontanella-Khan, 2008 ; Sridhar, 2011 ; Gupta and Barman, 2016 ).

Many M&A transactions after the 2G spectrum licences auction of 2008 saw a significant increase in financial valuations of telecom companies as demand from foreign companies to invest in Indian companies increased sharply. The Comptroller and the Auditor General’s report ‘Union Performance Report of Civil Allocation of 2G Spectrum’ used the post-2G spectrum allocation financial valuations of Indian companies to calculate the extent of under-pricing of the 2G spectrum licences and found that cumulatively the exchequer had lost over INR176,000 crore (US$26 billion), indicating that owners of telecom companies would have benefited about the same amount from selling their stakes to foreign companies ( CAG, 2010 ; Kaushal and Thakurta, 2010 ). In 2009, the Norwegian company Telenor acquired a 49% stake in Unitech Telecom for US$325 million ( Sridhar, 2011 ). In 2010, Reliance Industries acquired 95% of Infotel Broadband Services for US$755 million ( Thakurta, 2016a ). Another significant acquisition in 2010 was Bharti Airtel’s acquisition of Zain, a Telecom company with operations based in 15 African countries, for US$10.7 billion ( Leahy, 2010 ). In 2017, Idea Cellular and Vodafone merged, to create Vodafone–Idea with a transaction value of US$23 billion ( The Economic Times, 2017 ). The Appendix lists some of the major M&A activities in the telecom sector between 1998 and 2017.

3.2.2 Spinoffs and corporate restructuring

The second financial practice to be discussed in the Indian context is spin-offs and corporate restructuring. In most of the literature in corporate finance, this is when a company reorganises its financial, operational and organisational structure ( Damodaran, 2014 ; Brealey et al., 2016 ; Ross et al., 2016 ). Theoretically, corporate restructuring streamlines the business of a company and increases its financial value. The most common type of corporate restructuring in the telecom sector has been spin-offs. A key way in which spin-offs create financial value is by using the market value, rather than book value of assets that are transferred from the existing company to the new company.

Most of the accounting practices in India do not allow assets to be recorded at market value and are only recorded at their original cost. For telecom companies, assets such as spectrum licences, telecom infrastructure and telecom technologies tend to have a much lower book value than their current market value. A prime example of higher financial evaluation from spin-offs is the case of Bharti Airtel, who spun off several of its divisions and created subsidiaries to which assets were transferred at book value. These subsidiaries then revalued the assets at the market price, and after 2 or 3 years these subsidiaries were re-merged with the parent company, creating additional financial value of over INR44,000 crore (US$6.1 billion) between 2006 and 2010 ( Thakurta and Ghatak, 2015 ; Thakurta, 2016b ).

3.2.3 Share buyback and initial public offering

The third financial practice to be discussed in the Indian context is share buybacks, described in corporate finance textbooks as when a company repurchases its shares from the stock market to boost the price of its outstanding shares ( Lazonick, 2012 , 2014 ; Damodaran, 2014 ; Brealey et al., 2016 ). In 2018, Bharti Airtel proposed to buy back 35.8 million equity shares or 0.9% of the shares outstanding at INR400 per share (with a face value of INR10). The announcement immediately increased Bharti Airtel’s share price from INR360.15 to INR376.7 ( BusinessLine, 2018 ).

The final financial practice to be discussed in the Indian context is initial public offering (IPO), i.e. when a company goes to the stock market to raise capital for the first time. It creates wealth for the owners as the IPO’s listing stock price is much higher than the owners’ initial investment and subsequently if the stock prices increase after listing, then the owners’ stand to benefit even more ( Damodaran, 2014 ; Brealey et al., 2016 ). For example, in 2002, Bharti Tele-Ventures had an IPO and offered INR10 shares for INR47, where the share premium was 4.7 times the face value of the shares ( Bharti Tele Venture IPO Prospectus, 2002 ). The company may choose to issue only a percentage of their authorised capital, allowing the owners of the company to retain much of their stake. The post-IPO’s valuation price of the shares is then used to value the owner’s stake (at market value), even though his/her stake is not listed on the stock exchange. The owners would stand to multiply their initial investment several times through the financial valuation of their stakes in a company during an IPO. For example, Sunil Bharti Mittal, the owner of Bharti Group of companies became a billionaire with a personal net worth of over US$5.4 billion after the IPOs of his telecom companies, Bharti Airtel and Bharti Infratel etc.

Such financial practices allow the owners of telecom companies to capitalise on their financial valuations and generate financial gains despite telecom companies’ high levels of leverage and low profitability. Interestingly, as mentioned before, the state also has a strong interest in helping telecom companies increase their financial valuations. Doing so not only ensures the financial health of the telecoms sector but also allows banks to lend more to telecom companies. Unlike the private sector, the state does this through changes in policy in favour of businesses.

The state has a strong interest in helping telecom companies increase their financial valuations as doing so not only ensures the financial health of the telecoms sector but also allows banks to lend more to telecom companies. Access to greater credit allows telecom companies to bid higher amounts in spectrum licence auctions, which increases the state’s non-tax revenue. All major changes to telecom policies have been unidirectional in favour of boosting the financial valuations of private telecom companies and can be traced back to moments of decline in the profitability of these companies. These include the introduction of the (previously mentioned) 1999 NTP (when the telecom sector experienced a crisis) which allowed spectrum licence holders to switch from a fixed licence fee model to a revenue-sharing model thereby boosting their profits and their financial valuations. Similarly, the state introduced the 2012 NTP, a response to the crisis arising from telecom companies’ being overleveraged in order to repurchase their cancelled 2G licences in 2012 ( Bhandari, 2012 ; Thakurta and Ghatak, 2012 ). This change allowed private companies to pool, share and trade their spectrum licences, further spurring financial practices such as M&As, thereby enhancing their financial valuations. Likewise, the change brought about by the National Digital Communications Policy 2018 reduced spectrum usage charges and extended the instalment payment periods in response to the crisis that arose from a destructive price war following Reliance Jio’s entrance in the sector ( Bhatia and Palepu, 2016 ). These policy changes in favour of telecom companies show the state’s role in driving financialisation in the telecom sector.

Financial valuation-led accumulation thus points to a disconnect between the profitability of the underlying business and the financial valuation of a telecom company. As a significant source of gains for owners of telecom companies come from financial practices instead of the business of providing telecom services, telecom companies can grow and expand their businesses despite increasing levels of financial stress from debt and the lack of profitability. Taken together, bank credit-led accumulation and financial valuation-led accumulation demonstrate how the process of financialisation in the Indian telecom sector takes place and how the symbiotic relationship between the state, telecom companies and public sector banks transforms highly indebted telecom companies into attractive financial assets, which are traded for financial gains. It should be noted that many other sectors in India, especially infrastructure (including road transport infrastructure services, electricity generation, electricity distribution, coal and lignite, crude oil and natural gas, minerals, construction and cement) are also highly indebted to the public sector banks ( RBI, 2019 ). Further research needs to be done to establish the rate at which these sectors are financialising.

Although India shares many common characteristics of financialisation with other developing countries, as discussed in Section 2, this section aims to highlight some of India’s unique modalities of financialisation and contrast it with those in other developing countries. Drawing on the case study of the telecom sector, this section highlights four key features of financialisation in India and contrasts it with those in developing countries.

First, at the heart of the process of financialisation in India is its unique financial system which is a predominantly state-controlled banking sector and a market-driven finance sector ( Jayadev et al., 2018 ). Although the banking sector was liberalised, financial reforms in the banking sector were implemented unevenly and remain far from complete ( Corbridge and Harriss, 2000 ; Chandrasekhar and Ghosh, 2004 ; Kohli, 2006b ). To date, private and foreign banks have not been able to replace the state-controlled public sector banks, which still dominate financial intermediation. 5 The pace and the degree of financial reforms in the finance markets were substantially greater after the abolition in 1992 of the Capital Issues (Control) Act of 1947, which made it easier for businesses to raise capital from the financial markets ( Kohli, 2006a ; Chandrasekhar and Pal, 2006 ). The state progressively permitted foreign financial flows, which led to significant increases in stock market prices ( Chandrasekhar and Ghosh, 2004 ) and real estate prices ( Rajshekhar, 2013 ; Gupta, 2017 ). As the state permitted private businesses to enter the financial sector, financial activity in the economy increased substantially; mutual funds, private equity and venture capital investments grew rapidly ( Chandrasekhar, 2007 ).

State-controlled public sector banks make it easy for big businesses to benefit by taking on large amounts of debt, which on the one hand, transfers the risk of significant losses in the underlying businesses to the banks on the downside, while, on the other hand, allows the owners of big businesses to benefit from gains on the upside ( RBI, 2014 ). Loans to businesses in India account for 63% of the total loan amount in the banking sector ( RBI, 2017b ). As public sector banks are often not directly subjected to the vagaries of the market; large loan approvals are often made with some political or bureaucratic interference with little regard for the profitability or sustainability of the venture. Banks under the guise of best practices justify their lending decisions through the use of market-driven financial valuations, which were derived directly from the stock markets or from a reference price of a similar company ( Kochanek, 1995 ; Chibber, 2003 ; Bhagwati and Panagariya, 2013 ; Chandrasekhar and Ghosh, 2018 ). As a result of a predominantly state-controlled banking sector and market-driven finance sector, there has been a narrowing of the alliance between the state, banks and big businesses ( Kohli, 2012 ; Chandrasekhar and Ghosh, 2018 ). Lending by banks is increasingly based on the financial value of a company’s assets rather than its cash flow; allowing large businesses (with large asset bases) to borrow extensively, regardless of their profitability or their cash flow. The divergence between a company’s profitability and the price of its assets has resulted in high financial valuations of many loss-making businesses, which in turn has promoted financialisation in India.

Second, unlike the financialisation trends of short-termism and asset bubbles-related crises in many developing countries, India has been able to avoid such crises to a certain extent as its state-controlled public sector banks are less vulnerable to market fluctuations and are able to absorb losses from across many industries. As a result, there is a ballooning of the aggregate gross NPAs of banks, which reached a historical high of 12.1% of total banking assets in 2018 ( RBI, 2018 ). The state is able to control crises (to some extent) through periodic recapitalisation and consolidation of ailing banks ( Adhikari, 2017 ; Chandrasekhar and Ghosh, 2018 ; Mukherjee, 2018 ).

Third, another feature of financialisation in many developing countries entails the state deregulating the financial sector with the aim of financially integrating into the global economy ( Ashman and Fine, 2013 ). In India, the state has a direct financial interest in facilitating and promoting financialisation as significant amounts of tax and non-tax revenues of the state are dependent on increasing financial values of assets as seen in the telecoms sector case study.

In addition, as long as the rate of increase in the financial value of the assets (collateral) is higher than that of the growing NPAs in the banking sector, the state can maintain financial stability in the economy. Financial deregulation in India has been uneven and piecemeal ( Kohli, 2012 ; Chandrasekhar and Ghosh, 2018 ); the reforms are designed to attract foreign investments, but the Reserve Bank of India tightly controls the financial practices of banks and limits financial activities ( Jayadev et al., 2018 ) such as Indians investing abroad, currency convertibility, ability of banks to sell complex financial products etc., which reduces India’s exposure to the international financial system. Therefore, unlike many other developing countries, where financialisation occurs as these countries are increasingly exposed to the international financial markets ( Lapavitsas, 2009 ; Painceira, 2010 ), the process of financialisation in India is more organic or home-grown, limiting the role that global factors play, giving it a less subordinated character as compared to many other developing countries ( Powell, 2013 ).

Finally, the process of financialisation in India also differs from those in other developing countries when we consider some of the key consequences of financialisation. In many other developing countries, studies show that as a sector or service is financialised, it results in commodification, unequal access and it quickly becomes unaffordable to the poor. For example, Lis (2014) shows the impact of the financialisation of water in Poland, Unsal (2021) on the electricity and housing sector in Turkey and Pereira (2017) on housing in Brazil. In India, financialisation of the telecom sector has resulted in increased access to telephony and the internet as cost of calls and cost of data have fallen significantly, making it more affordable than before. As seen in the case study, the risk is borne by the public sector banks and the costs are distributed among current and future taxpayers as the state periodically recapitalises the banks. Further sectoral studies are necessary to find out the extent and the scope of this trend in other sectors in India.

This article provides an empirically grounded and detailed analysis of how financialisation takes place in a developing country such as India through the lens of the Indian telecom sector and contrasts it with trends and modalities of financialisation in other developing countries. It contributes to the existing body of research on financialisation in developing countries, and literature on the political economy of India both theoretically and empirically.

Theoretically, this article contributes to the wider literature on financialisation by pointing to the difficulties of applying an Anglo-Saxon conceptualisation of financialisation to developing countries such as India. The concept of capital market driven financialisation is ill-adapted to the dynamics of developing countries in which financial markets are relatively underdeveloped, illiquid, and their regulation is often not as extensive and enforcement tends to be lax. Thus, the market dynamics described in existing literature do not always apply to developing countries such as India.

Additionally, this article contrasts the characteristics and trends of financialisation in developing countries with those in India by pointing to the uniqueness of India’s financial system, which is a combination of a predominantly state-controlled banking sector and a market-driven finance sector ( Jayadev et al., 2018 ). This combination creates a fertile ground for financialisation to take root. More specifically, it allows big businesses to take advantage of this system by borrowing significant sums from state-controlled public-sector banks and as a result, transferring risk of significant losses to the banks while keeping the gains on the upside. This practice effectively socialises losses while keeping gains private. It also increases the financial valuations of the businesses, allowing the owners to buy and sell the businesses as financial assets thereby enriching them.

Empirically, this article demonstrates how the process of financialisation takes place in the telecom sector through two subprocesses. First, bank credit-led accumulation, which describes how telecom companies borrow money primarily from public-sector banks to acquire spectrum licences from the state and to fund their operations. The highly leveraged position of the telecom companies transfers the risk of the business to the public-sector banks, making those companies attractive financial investments. Second, financial valuation-led accumulation, which describes how telecom companies are valued and traded as financial assets at prices favourable to their owners. Together, these processes demonstrate the India-specific modalities of financialisation and detail the institutions, policies and practices that aid its production and reproduction.

None declared.

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In 2017, the public-sector banks’ exposure to the telecom sector was in excess of INR420,000 crore (US$64.4 billion) ( Manchanda and Roy, 2017 ), making the telecoms sector the third most indebted sector in the Indian economy ( RBI, 2017b ). Note that a crore in the Indian numbering system is equivalent to ten million.

The deterioration of economic conditions can be exogenous (increase in interest rates, general downturn in the economy) and/or endogenous (price wars, declining in average revenue per user, increase in costs of technology/network management etc).

Data for many private telecom companies is not easily available as most of them are not publicly traded. Most telecom companies are either owned, controlled and/or run as a division of their parent company—Reliance Jio, Vodafone, Idea Cellular among others. For example, in case of Vodafone India, Vodafone Inc. (UK) consolidated the Indian operations with its global operations before releasing its annual report, therefore there was limited information available on Vodafone India. Similarly, Reliance Jio is a part of Reliance Industries and Reliance Industries does not provide separate accounts for Reliance Jio’s revenues, costs and investments, which made the financial evaluation of Reliance Jio very difficult.

The interest-coverage ratio indicates a company’s ability to honour its debt obligations, as it measures how many times the company’s profits can cover its interest obligations.

The share of the credit outstanding of public sector banks in India is 66.7%, while private sector banks is 28.7% and foreign banks is 4.6% as per June 2017 ( RBI, 2017a ).

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Corporate Restructuring: A Case Study of Adani Enterprises, India

Corporate Restructuring has become a major component in the financial and economic environment all over the world. It is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, like positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction and many more. Corporate restructuring is needed to counter challenges in competitive business environment. Most of the organizations carry out corporate restructuring as per the needs of the business. Some do it through mergers, acquisitions, and some by demergers as well; while some others make structural changes and carry out resource optimization in the organization. During the past decade, corporate restructuring has increasingly become a staple of business and a common phenomenon around the world. Unprecedented number of companies across the world have reorganized their divisions, restructured their assets and streamlined their operations in a bid to spur the company performance. Corporate Restructuring generally includes a diverse array of company actions, from selling business lines to acquiring new business lines, from downsizing workforces to the addition of new business units and from stock repurchase to debt elimination. It has enabled numerous organizations to respond quickly and more effectively to new opportunities and unexpected pressures so as to re-establish their competitive advantage. This paper analyzes the corporate restructuring of Adani Enterprise’s, announced at the start of 2015 and approved by the board and shareholders in April 2015.

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• Published: 06 November 2018

Implications of corporate governance on financial performance: an analytical review of governance and social reporting reforms in India

• Puneeta Goel   ORCID: orcid.org/0000-0002-0563-7671 1  

Asian Journal of Sustainability and Social Responsibility volume  3 , Article number:  4 ( 2018 ) Cite this article

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Currently the corporate governance reforms in India are at cross roads where though the intention behind the reforms is good yet there is a need to look for a complete solution addressing country specific challenges in Indian context. Keeping pace with developments at international level, India also introduced reforms for improving corporate, social and environment disclosures. This paper explores the effectiveness of these corporate governance reforms by analyzing the corporate governance practices followed by Indian companies in two reform periods (FY 2012–13 as Period 1) and (FY 2015–16 as Period 2). Considering mandatory regulations as per clause 49 of Listing agreement with Securities exchange board of India and the governance norms in the new Company Act, 2013, a corporate governance performance (CGP) index is developed to measure corporate governance score of Indian companies. Though there is a significant improvement in corporate governance structures implied by Indian companies but the number of independent directors inducted in the board decreases after the reforms in period 2. All the sectors under study show a significant improvement in following corporate governance practices after the reforms. The study reported a significant relationship between integrated framework of total corporate social performance and financial performance only in period 1. Corporate governance reforms do not impact financial linkages in Indian market in period 2.

Introduction

The economic success of an organization is not only dependent on efficiency, innovation and quality management but also on compliance of corporate governance principles. Implementation of corporate governance standards improves financial performance of the company as well as positively impacts internal efficiency of the firms (Tadesse, 2004 ) in developed economies. However, lack of transparency and poor disclosure practices reduce effectiveness of corporate governance mechanism. Though, global financial crisis and major corporate scandals have reinforced the merit of good corporate governance structures in enhancing firms’ performance and sustainability in the long run (Ehikioya, 2009 ).

Corporate governance aims at facilitating effective monitoring and efficient control of business. Its essence lies in fairness and transparency in operations and enhanced disclosures for protecting interest of different stakeholders (Arora and Bodhanwala, 2018 ). Corporate governance structures are expected to help the firm perform better through quality decision making (Shivani et al. 2017 ). A wider definition given by Maier ( 2005 ) states that “Corporate governance defines a set of relationships between a company’s management, its board, its shareholders and its stakeholders.” Good corporate governance “ensures that corporations take into account the interests of a wide range of constituencies, as well as of the communities within which they operate, and that their boards are accountable to the company and the shareholders” (Organization for Economic Cooperation and Developement, 1999). Corporate governance was originally developed to protect shareholder’s interest but gradually it has gained importance for other stakeholders and society (Jizi, Salama, Dixon, Startling, 2014 ).

Corporate governance identifies the role of directors and auditors towards shareholders and other stakeholders. Corporate governance is significant for shareholders as it increases confidence in the company for better return on investment. For other stakeholders like employees, customers, suppliers, community and environment, corporate governance assures that company behave in a responsible manner towards society and environment (Kolk and Pinkse, 2010 ). Thus, corporate governance is not only about board accountability but also include aspects of social and environment responsibility.

Earlier good governance was not a mandated legal requirement and adherence was voluntary, but owing to corporate failures on account of unethical practices at top level management, most of the countries have initiated mandatory norms and guidelines to strengthen corporate governance framework. The Cadbury Committee report in United Kingdom (UK) in 1992 and Sarbanes Oxley (SOX) Act in United States (US) in 2002 are considered a seminal development in corporate governance regulations followed by similar codes of good governance in rest of the countries. The governance codes become a source of normative institutional pressure for convergence within a country (Yoshikawa and Rasheed, 2009 ).

Corporate governance reforms are more significant for developing economies as they make the corporate structures more effective, help in competing with multi-national corporations and increase investors confidence (Reed, 2002 ). Keeping pace with the global developments, India has witnessed a series of such reforms in corporate governance. One such reform is introduction of clause 49 of listing agreement by Security Exchange Board of India (SEBI), apex regulatory authority of stock market in India. This clause outlines corporate governance structures for listed companies in India. It has led to significant implications on independent directors on board, enhanced disclosure requirements, making audit committees more powerful etc. Further, corporate governance initiatives are strengthened with the introduction of revised Company Act, 2013.

Though, corporate governance norms and other disclosure guidelines have been introduced in India but owing to weak implementation, the extent of compliance by the Indian companies is still questionable. Countries with weak legal norms have suffered higher depletion in exchange rates and stock market decline (Johnson, Boone, Breach and Friedman, 2000 ). Dharmapala and Khanna ( 2013 ) emphasize on the importance of enforcement of legal reforms in developing economies which are marred by weak systems, corruption and bureaucratic influence on policy implementation. Most of the previous studies highlight the impact of corporate governance on financial performance but surprisingly there is dearth of literature on impact of corporate governance reforms on corporate disclosures and reporting. This backdrop gives an interesting case to study the impact of reforms and amendments on improvement corporate governance disclosures in Indian companies.

Moreover, previous literature has focused on corporate governance in a particular sector like Information and Technology (IT) sector (Rajharia and Sharma, 2014a ; Rajharia and Sharma, 2014b ), Manufacturing sector (Saravanan, 2012 ), Textile sector (Ashraf, Bashir and Asghar, 2017), Banking and Financial Services (Arif and Syed, 2015 ) but the comparison of different sectors (Palanippan and Rao, 2015 ) is very limited. This study investigates the nature and type of corporate governance activities followed by top Indian companies in different sectors.

Extant research in this domain establish association between corporate governance and stock market performance (Klapper and Love, 2004 ; Cheung, Stouraitis and Tan, 2010 ; Abatecola, Caputo, Mari and Poggesi, 2012 ; Beiner, Drobetz, Schmid and Zimmermann, 2006 ; Brammer, Brooks and Pavelin, 2009 ; Brown and Caylor, 2006 ; Bauer, Guenster and Otten, 2004 ). However, very few studies have focused on the impact of corporate governance reforms and its linkage with financial performance. This paper investigates the plausible connection between corporate governance after reforms and firm valuations for India during two different periods of reforms on select sectors.

The paper has been organized in six sections. Background of the study is discussed in section one. Section two outlines recent developments in corporate governance norms in India. Section three reviews existing literature across economies, while section four discusses the methodology adopted. Statistical analysis of the impact of India’s corporate governance reforms on firm performance is reported in section five followed by discussion, conclusion and policy implications in the last section.

Recent developments in corporate governance norms in India

Corporate governance reforms have significant importance for India which is moving towards a more transparent and accountable system of economic governance (Sanan and Yadav, 2011 ). The fiscal crisis in 1991 led to liberalization and privatization of Indian economy. The Indian companies required finance for growth and expansion. The need of foreign investment gave rise to the need of corporate governance reforms in India. Since then, good governance in capital market has always been on high priority for SEBI. This is evident from frequent updation of guidelines, rules and regulations by SEBI for ensuring transparency and accountability (Sehgal and Mulraj, 2008 ). Clause 49 was adopted by SEBI in 1999 from the code of governance developed by Confederation of Indian Industry (CII), an independent organization working with government on policy issues. It has been revised time to time to ensure better compliance.

India introduced reforms for improving corporate, social and environment disclosures. Ministry of Corporate Affairs, Government of India published ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’ in 2011 (Ministry of Corporate Afairs, 2011 ). The guidelines make it mandatory for the listed companies to file Business Responsibility Report (BRR) to enhance the quality of disclosures (SEBI Circular, 2012 ). The enactment of the companies Act 2013 replaces the Companies Act, 1956 and aims to improve corporate governance standards to simplify regulations and enhance the interests of minority shareholders (Prasanna, 2013 ). India is among the first country to implement mandatory Corporate Social Responsibility (CSR) spending and this Indian model will set precedence for other countries in the world, for strategic implementation of corporate governance policies.

As per the latest revision in 2014, clause 49 includes protection of shareholders rights, proper and timely disclosures, Chief Financial Officer (CFO) certification of financial statements, equitable treatment of shareholders, enhance responsibility of board and norms for preventing insider trading. To sum up, corporate governance in India is mainly concerned with improving accountability and transparency, disciplining dominant shareholders, protecting the interest of minority shareholders. This is in contrast to US and UK which concentrates on making management more accountable to dispersed shareholders (Pande and Kaushik, 2012 ).

Review of literature and hypothesis development

Impact of corporate governance reforms on disclosures.

In general, almost all countries have issued general guidelines for governance, social and environmental reporting, but it would result only as a tick-in-the-box activity unless it is checked to what extent the corporate world is responding and reporting as per the new reforms. Many researchers have studied the impact of the recent reforms for improving governance, social and environment disclosures in different economies. In Portugal, Monteiro and Guzman ( 2010 ) explore that the extent of disclosures have improved as compared to the pre reform period but the amount of disclosures is still low even after the introduction of new reforms. Ioannou and Serafeim ( 2017 ) study the implications of disclosure reforms in China, Denmark, Malaysia and South Africa and suggest that improvement in sustainability disclosures due to introduction of reforms is associated with increase in firm value. Kolk ( 2008 ) asserts that after the reforms in disclosure regulations, many countries in Europe and in Japan have started paying attention to board supervision, ethics compliance and external verifications. Chen, Hung and Wang ( 2018 ) affirm decrease in industrial waste and Sulfur Dioxide (SO2) emissions after the declaration of disclosure mandate in China but the firms adopting CSR reporting experience decrease in profitability.

India initiated reforms concerning corporate governance, corporate social responsibility and environment to improve disclosures by Indian companies. Implementing corporate reforms, however, is significantly difficult than framing those reforms. There are many challenges in successful implementation and effective enforcement of reforms such as local inhibitions and comprehensive rules (Afsharipour, 2009 ), lack of availability of qualified independent directors (Malik and Nehra, 2014 ), underdeveloped external monitoring systems and weak and multiple regulatory norms (Rajharia and Sharma, 2014a ; Rajharia and Sharma, 2014b ). This gives the need to explore the actual impact of reforms on corporate governance and disclosures by Indian companies.

There is an interesting observation about these disclosure regulations that it contains a clause of “comply or explain”. It means that either the companies should comply by the norms or explain the reasons for not following the mandatory requirements. Moreover, there is no penalty for non-compliance as well. It gives an option to the companies either to follow the regulations or safely escape by giving some explanation. There may be some companies which were following the best practices in corporate governance even before these reforms were introduced. But, there may be others, which have started doing the same after these reforms. This argument justifies that there is no obvious reason to believe that reforms would result into better compliance and reporting. Therefore, it becomes important to explore the practical implications of these reforms for Indian companies and for policy makers.

Corporate governance reforms draw increased strategic attention in India. These structural changes and disclosure reforms make an interesting case to investigate their implications on Indian companies. Accordingly, this research studies the corporate governance by Indian companies after the introduction of the above stated recent reforms. No previous research has investigated the impact of these reforms considering two different periods of reforms.

Thus, the first hypothesis of the study is:

HO1: There is no significant improvement in corporate governance performance of Indian companies after the introduction of reforms.

Impact of corporate governance reforms on different sectors

Many researchers have studied the impact of corporate governance in different sectors of the economy. There is a significant impact of corporate governance on firm performance in textile sector (Ashraf et al. 2017 ) and in Banking and Financial services sector (Arif and Syed, 2015 ) in Pakistan. While comparing different sectors, Banking, Insurance and Service sector companies listed in Amman stock exchange perform better after the introduction of corporate governance reforms in Jordan (Mansur and Tangl, 2018 ). Jizi et al. ( 2014 ) find board independence and board size significantly related to improved CSR disclosures for banking sector in US. Okoye, Evbuomwan, Achugamonu and Araghan ( 2016 ) report a significant impact of corporate governance on banking sector in Nigeria. Palaniappan and Rao ( 2015 ) report significant impact of corporate governance disclosures on firm performance for manufacturing companies taking only one company from ten different sectors in India.

Many studies have been conducted testing the impact of corporate governance on firm performance taking a set of listed companies in varied stock exchanges across different economies. Gompers, Ishi and Metrick ( 2003 ) report better governed firms listed in New York Stock Exchange (NYSE) show higher market valuation and low expenditure. Bauer et al. ( 2004 ) reveal the same results for companies in Financial Times Stock Exchange (FTSE), Eurotop 300 index giving higher stock returns and enhanced firm valuation for the better governed companies. Studies on US listed firms also highlight positive relationship between corporate governance rankings and Tobin Q (Klapper and Love, 2004 ; Durnev and Kim, 2005 ). Similar findings are also reported in studies conducted on Italian (Abatecola et al., 2012 ) and Swiss (Beiner et al., 2006 ) firms which confirm that corporate governance has a significant statistical relationship with corporate performance variables like Return on Capital (ROC), Return on Assets (ROA).

An interesting observation from these studies is that most of the research has been done on a whole set of listed companies in a stock exchange or a set of listed companies in a particular sector but very few studies have done comparison of corporate governance in different sectors. Corporate governance reforms along with liberalization and privatization has led to substantial development and strategic changes in different sectors of the economy (Reed, 2002 ). This study investigates the nature and type of corporate governance activities, followed by top 100 listed Indian companies of different sectors, after the introduction of recent corporate governance reforms in India and tests the sector differences for two periods of reforms.

The second hypothesis of the study is:

HO2: There is no significant difference in corporate governance in different sectors in India.

Corporate governance reforms and firm performance

In general, corporate governance is considered to be a significant variable influencing growth prospects of an economy because best governance practices reduce risk for investors, improves financial performance and helps in attracting investors (Spanos, 2005 ). Monda and Giorgino ( 2013 ) document better corporate governance results in higher market valuation and ROA for companies listed in France, Italy, Japan, UK and US. Cheung et al. ( 2010 ) confirm that firms which have adopted corporate governance reforms appear to have better risk return trade off for investors in Hong-Kong stock market. Bae and Goyal ( 2010 ) find that good corporate governance practice adopted by Korean firms have resulted in improved equity market performance and increased foreign ownership in companies. Yang, Yan & Yang ( 2012 ) state that improved corporate governance disclosures by US firms help in reducing cost of equity. Botosan ( 2006 ) also substantiated in an extensive literature review that proper disclosure of financial reporting and corporate governance practices help in reducing the cost of equity capital. There have been a few studies which contradict the above mentioned findings. For instance, Bhagat & Bolton ( 2008 ) find corporate governance measures not correlated to future stock market performance for NYSE listed firms while Roodposhti and Chashmi ( 2010 ) report a negative correlation between ownership and independent board and earnings of the companies in Iran.

Similarly Indian companies are publicizing their efforts through corporate governance disclosures to attract the investors which have also led to enhancement in market valuation (Dua and Dua, 2015 ). Improvement in corporate governance has lead to significant increase in investment by foreign investors and profitability of Indian companies (Patibandla, 2006 ). Firms adopting corporate governance reforms appear to have better risk return trade off for investors (Prasanna, 2013 ; Mohanty, 2003 ). Examining the relationship between corporate governance and firm performance for firms listed in National Stock Exchange of India (Nifty 500), Shivani, Jain and Yadav ( 2017 ) find that while larger boards, committees of the board are negatively related to ROA and Return on Equity (ROE), presence of non-executive directors and whistle blower policy have positive impact.

In contrast to the above findings, Sarpal & Singh ( 2013 ) reports no significant relationship between board and corporate performance. Kumar ( 2004 ) specifies no significant relation between foreign shareholding and financial performance of Indian companies. Tata and Sharma ( 2012 ) find that corporate Governance practices such as board structure, ownership and other such disclosure have no significant relationship with corporate performance. Misra and Vishnani ( 2012 ) are of the view that reforms and change in corporate governance have no significant impact on the market risk of the companies listed in Group – A of Bombay Stock Exchange (BSE). The review of literature gives mixed results for Indian companies. Hence, this needs to be further scrutinized to draw any concrete conclusions.

Indian investors responded positively to clause 49 reforms initiated in 1999 and the large firms gained 4.5% on an average for three days from the date of announcement of the reforms in contract to negative reaction by investors towards SOX in developed countries (Black and Khanna, 2007 ). Other recent studies extend immediate positive effect into tangible long-term outcomes. Kohli and Saha ( 2008 ) report positive and significant relationship between corporate governance reforms and firms’ performance. The increase in scope of clause 49 improves debt- equity structures of Indian companies (Goel and McIver, 2015 ). Dharmapala and Khanna ( 2013 ) put a strong case for causal effect of changes in clause 49 on firm value and underscore the significance of enforcement of regulatory norms. Clause 49 has improved stock market sentiments which result in more reliance on equity capital and less dependability on bank loans (Saher, Pal and Pinheiro, 2015 ).

Since a very limited literature is available to study the impact of reforms on corporate governance and firm performance, it will be interesting to evaluate the impact of changes in governance, social and environment disclosure norms on financial performance after the introduction of the recent reforms. Thus, this study explores the linkage between corporate governance and financial performance of the companies in two different periods of reforms in India.

HO3: There is no significant impact of corporate governance reforms on financial performance of Indian companies in both the periods under study.

Methodology

For this study, the researcher constructs a firm specific corporate governance performance index for Indian companies based on recent reforms introduced in the country. This paper takes into consideration two periods P1 (2012–13) and P2 (2015–16) representing two different stages of corporate governance reforms in India. The study develops an integrated empirical framework to measure the valuation effects of corporate governance mechanism.

Sample and data collection

The sample for the study is drawn from the top 100 companies ranked on the basis of revenue in the list of The Economic Times 500 (ET500), 2016. From the selected companies, 28 companies of Banking and financial services sector have been excluded from the purview of this paper as disclosure and profitability norms are different for this sector in India. Further, 4 companies are also excluded from the study as data for the period under study was not available. The finally selected companies have been categorized under six major sectors. Table  1 shows the sector-wise composition of the companies under study.

Published Annual Reports, Business Responsibility Reports and Sustainability Reports of the selected companies are taken as the primary source of data. These reports are collected/ downloaded from the website of the respective companies. The reports have been reviewed thoroughly to do the content analysis for the selected dimensions under study (Quick, 2008 ; Sandhu and Kapoor, 2010 ; Gautam and Singh, 2010 ). All the information available in the reports on a particular dimension has been collated to give the final score for each aspect. All the reports were reviewed at least twice so that no item is missed while collecting the requisite information to ensure accuracy and trustworthiness of the data. Instead of using binary score of 0 and 1, this study gives credit to the type of reporting, the amount of information disclosed, number of good governance practices adopted by any company (Cheung et al., 2010 ). Scoring for different dimensions is in a range of zero to three. Financial data used in this study is mainly acquired from published data available in the Centre for Monitoring Indian Economy (CMIE) Prowess database.

Measuring corporate governance

Most of the previous studies have used only a specific aspect of corporate governance to study its implications of financial performance such as board size (Black, 2002 ), independent directors (Kaur and Mishra, 2010 ; Annalisa, P. & Yosef, 2011 ), board meetings (Misra and Vishnani, 2012 ; Subramanian and Reddy, 2012 ) and code of ethics (Liao, 2010 ; Mittal, Sinha and Singh, 2008 . This study uses a comprehensive corporate governance performance index for measuring corporate governance of Indian companies based on recent developments in corporate governance norms in India. This index is based on changes in clause 49, Company Act, 2013 and other mandatory guidelines issued by Ministry of Corporate Affairs of India. Some of the dimensions of mandatory disclosures are excluded from the study such as appointing audit committee, CFO certification of financial statements, certificate of compliance by board of directors The exclusion has been done as the pilot study done on one sector revealed that the score is same in both the periods for all the companies. Since corporate governance is based on stakeholder approach (Freeman and Evan, 1990 ), different stakeholders are taken as individual responsibility centers for measuring cumulative corporate governance performance to meet corporate business objectives (Barter, 2011 ; Clarkson, 1995 ). The responsibility towards different stakeholders included in the study are shareholders (SHR), employees (EMR), suppliers and consumers (SCR), community (CMR) and environment (ENR). Table  2 elaborates the final instrument used to measure Corporate Governance Performance (CGP) index. Cronbach’s alpha test of reliability of data revealed a score of 0.840.

Using paired sample t-test corporate governance performance of each parameter in Period 1 is paired with the same in Period 2 to check the significant difference for each dimension for the two periods under study. Further, sector comparison has been done by calculating the percentage score of each sector for every stakeholder using the formula:

One way Analysis of Variance (ANOVA) is applied to study the significant difference in performance of different sectors under study.

Measuring financial performance

Most of the scholars have used any one of the three approaches of measuring corporate financial performance i.e. Accounting Ratios (Griffin and Mahon, 1997 ; Bayoud, Kavanagh and Slaughter, 2012 ) or Market Valuation Ratios (Kiel and Nicholson, 2003 ; Arnold, Bassen and Frank, 2012 ) or Accounting and Market based mixed ratios (Mulyadi and Anwar, 2012 ). To correlate corporate governance performance with financial performance, we consider the third approach and take Tobin Q (Klapper and Love, 2004 ), Market Capitalization (Suttipun, 2012 ) and Price Earning (PE) (Siew, Balatbat and Carmichael, 2013 ; Tyagi, 2014 ) as market valuation ratios and ROS (Venanzi, 2012 ), ROE (Griffin and Mahon, 1997 ; Aggarwal, 2013 ) and ROA (Aupperle, Carroll and Hatfield, 1985 ; Tyagi, 2014 ) as accounting ratios.

Regression model

Regression model has been developed to examine the relationship of overall CGP score of company (independent variable – CGP taken as summation of corporate responsibility towards five different stakeholders- Shareholders, Employees, Suppliers and Customers, Community and Environment) with the financial performance of the company (dependent variables –ROS, ROA, ROE, Tobin Q, Market Cap and PE).

Control variables

Size of the company is an important control variable as Burke, Logsdon, Mitchell, Reiner and Vogel ( 1986 ) suggest that larger firms more often adopt social and governance principles and thus attract attention from stakeholders. Previous researchers have also considered risk as a factor that effects corporate social and financial performance. Thus, this relationship is studied by using size of the company as control variable calculated by natural log of total assets (Abatecola et al., 2012 ) and natural log of sales (Tsoutsoura, 2004 ) as its proxy. Additionally, beta is considered as another control variable for market risk element affecting corporate financial performance.

Six regression equations that shall be tested in this model are:

ROS =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

ROA =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

ROE =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

Tobin Q =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k CGP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

Market Cap =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k CGP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

PE =  β 0 + \( {\sum}_{k=1}^5\boldsymbol{\beta} \) k C GP + β 6 LnAssets + β 7 LnSales + β 8 beta + Ɛ

Data analysis

Impact of recent reforms on corporate governance in indian companies.

Table  3 clearly depicts the improvement in mean score of each stakeholder. The introduction of governance reforms in India results in substantial increase in mean score of total corporate governance performance in P2. Further, to test the significant difference in CGP for two periods paired t-test is applied.

Table  4 depicts a significant difference in performance of each parameter in two periods as the significant p value in all cases is less than 0.05 except for SHR2 i.e. having independent directors on board (p value: 0.254) and for ENR 3 i.e. achieving awards and achievements (p value: 0.321). Pair 17 represents cumulative CGP score and the p value of 0.000 shows a significant difference in overall corporate governance score of Indian companies during P1 and P2. Thus HO1 is rejected.

Sector differences in corporate governance performance

Analysis of Table  5 shows total percentage score of each sector towards each stakeholder. Over all there is improvement in CGP towards different stakeholders in each sector under study but it needs further statistical testing.

Table  6 shows the results of ANOVA to study the difference in corporate governance performance of different sectors. It gives an interesting observation that during P1, there is a significant difference between the sectors as the p value (0.006) is less than 0.05 but during P2, as the p value increases to 0.605, there is no significant difference between different sectors for their performance towards different stakeholders. Thus, HO2 is accepted for post reform period. It signifies when all sectors are making efforts to contribute towards different stakeholders, the sector differences reduce in post reform period. This is a positive impact of new corporate governance reforms on Indian companies.

Impact of corporate governance performance on financial performance

Table  7 presents the relationship between cumulative CGP score and six financial ratios using regression analysis. It is observed that CGP has positively and significantly influence on ROA, ROE and Tobin Q in P1 and only on PE in P2. Since the value of r 2 is low, only marginal variation in financial performance is explained by the model of corporate governance performance of Indian companies. The significant value of f stat helps to conclude that there is a significant relationship between corporate governance performance and different parameters of financial performance of Indian companies in P1. There is no significant impact of corporate governance on financial performance in P2. Thus, HO3 is rejected for P1 but accepted for P2.

Discussion, conclusion and policy implications

The study attempts to answer the following questions raised in the hypothesis:

Do reforms improve corporate governance in Indian companies?

All the companies under study have implemented good governance initiatives and recognized their responsibility towards different stakeholders. The introduction of corporate governance standards through clause 49 of listing agreement has helped in improving governance standards and internal efficiency of listed companies (Sharma and Singh, 2009 ; Goel & Mclver, 2015 ). Out of sixteen dimensions in corporate governance index, two dimensions did not show significant improvement. Indian companies need to pay attention on these dimensions namely, number of independent directors on board and achieving awards and recognitions during the year. The study finds that the number of independent directors as percentage of total directors has decreased over the period of time (Kaur and Misra, 2010 ). The reason may be attributed to shortage of qualified independent directors in India (Malik and Nehra, 2014 ; Rajharia and Sharma, 2014a , b ). Further, two positive changes identified in good governance practices, which are appointing women directors on board as required by new norms and instituting diverse board committees for protecting shareholders rights. These reforms aim at making the boards more powerful and focus on monitoring the management (Dharmapala and Khanna, 2013 ; Dua and Dua, 2015 ). Accordingly, it is observed that the number of meetings of board of directors has increased. Many companies have started conducted separate meetings of independent directors. This has increased the involvement of independent directors in different committees, which have made boards more responsible and accountable to stakeholders (Shivani et al. 2017 ; Khan, Muttakin and Siddiqui, 2013 ). It is observed that most of the companies are taking care of grievances of the employees and the customers. Yet, it is quite surprising that even some of the high revenue generating companies are not reporting the grievances as per the stipulated guidelines (Chatterjee, 2011 ).

As per the results of the study, though the spending on CSR initiatives has increased, yet Indian Companies are still trying to match the mandatory requirement of spending 2% of their profit on CSR initiatives (Sharma, 2013 ). Another interesting finding is that the score for social and environment initiatives is fairly high for all the companies, which suggests that Indian companies stress more on community welfare and environment protection in their social initiatives. This result is aligned with the previous studies done by Shanmugam & Mohamed ( 2011 ) and Kansal and Singh ( 2012 ). Kansal, Joshi, Babu and Sharma ( 2018 ) suggest that regulators should highlight specific disclosure norms for corporate social responsibility rather than giving only general mandatory guidelines. Many companies are working under public private partnership and with Non Government Organization (NGOs) to take up social and environment issues. However, reporting on pollution and carbon emission is very low for Indian companies (Kansal et al. 2018 ). It has been observed that frequency of publishing sustainability reports has improved over the period (Cyriac, 2013 ). Further, very few Indian companies are applying for internal quality, sustainability and environment protection awards as the procedure is cumbersome.

How do different sectors perform after governance reforms?

Oil, Power and Refinery sector showed consistent responsibility towards all stakeholders during P1. This sector is dominated by public sector enterprises, which warrants them to be more adherent to the mandatory norms. IT and Communication sector, with mostly private players, also performed reasonably well in P1. Most of the Indian companies in IT sector have multinational operations with business processes outsourcing model. Hence, it becomes imperative for them to follow international norms of corporate governance, sustainability and social responsibility (Narayanaswamy, Raghunandan and Rama, 2012 ). Thus this comprehensive reporting helps the companies in winning the international contracts and increase revenues. However, Palaniappan and Rao ( 2015 ) suggest IT companies have a long way to go to improve their corporate governance performance.

During P2, all the sectors showed significant improvement in corporate governance score. Specifically, Pharmaceutical and Chemical sector registered a substantial increase and are at the top of the table in the cumulative score. Transport and Auto sector is at the bottom of the list in both the time periods. Though, this sector shows a significant improvement in responsibility towards shareholders and employees yet it needs to take care of environment requirements and initiate more steps for welfare of the society. Further, Metal, Engineering and Infrastructure sector has the highest score for responsibility towards suppliers and consumers in both the periods under study but they need to stress on CSR reporting (Shamim, Kumar, Soni, 2014 ). For diversified sector, marginal improvement in the cumulative corporate governance score is recorded.

Another significant finding of the study is that in every sector the score of top four to five companies is relatively higher than the rest of the companies. This anomaly sometimes neutralizes the high score of top companies in a particular sector. To sum up, after the introduction of mandatory and non-mandatory norms for improving corporate governance, all the sectors have initiated different programs for stakeholders. This has reduced the difference in corporate governance score between the sectors in the post reform period. Similar findings were also reported by Bhasin ( 2012 ) and Bhardwaj and Rao ( 2014 ).

Do governance reforms impact financial linkage?

Total corporate governance score is a significant predictor of company’s market valuation and accounting performance. Positive direct association with Tobin q, ROA and ROE is captured in the period P1. Hence, the study concludes that better corporate governance performance leads to better financial performance in term of revenue and growth. Similar findings have been reported by earlier studies (Cortez and Cudia, 2011 ; Love and Klapper, 2002 ). In Japan, Bauer, Frijns, Otten, Rad ( 2008 ) find disclosures related to shareholders rights, remuneration and internal control, impact firm performance but disclosures related to board accountability do not affect stock prices. Studies conducted in Indian context also find a positive impact of corporate governance reforms on firm performance (Mohanty, 2003 ; Rajput et al., 2012 , Arora and Bodhanwala, 2018 ). Even in other developing economies like Pakistan, Ashraf et al. ( 2017 ); Arif and Syed ( 2015 ) find significant relationship between corporate governance and financial performance. However in Nigeria after the introduction or corporate governance norms, Sanda, Mikailu and Garba, ( 2005 ) report that presence of outside directors does not influence firm performance but the existence of expatriate Chief executive officers does. The regulatory authorities in Nigeria need to ensure strict compliance to improve the impact of reforms (Okoye et al., 2016 ). Mansur and Tangl ( 2018 ) find that after the introduction of governance code in Jordan, the presence of institutional investors in ownership structures help in improving firm performance in stock market.

However, an interesting finding for Indian companies is that after the introduction of the new governance reforms, the corporate governance performance improves but its impact on financial performance decreases. The study did not find any significant impact on market valuation ratios and accounting ratios in post reform period (Tripathi & Seth, 2014 ; Aggarwal, 2013 ). Hence, governance reforms actually do not impact financial linkages in Indian market during post reform period.

Conclusion and policy implications

This research concludes that Indian companies have made significant development in corporate governance after the introduction of recent reforms. Over all, it is observed that the main objective of the reforms has been achieved by making the board more responsible towards all stakeholders. The introduction of having at least one women director on board is a significant development for Indian companies. Regulators may further enhance women representation on board to improve gender parity at top management. Indian companies should appoint more number of independent directors as the role of independent directors becomes very significant for the successful implementation of these reforms. The target set for mandatory 2 % spending of net profits on CSR is still not achieved to full extent. Hopefully, in near future when the companies are able to identify the core areas of social responsibility, this Indian model can bring miracles for the development of the society. As a result, these philanthropic initiatives may yield better return on social investment. The mandatory publishing of business responsibility reports has improved disclosures for economic and social responsibility. Regulators should make disclosure of carbon foot prints mandatory to bring more awareness and responsibility towards environment. Initiating appropriate corporate governance rewards in different sectors would also encourage companies to follow the regulations and showcase their contribution towards society and environment.

All the sectors have endeavored to improve corporate governance performance as the investors have started recognizing good governance companies and this can also be used as a tool for attracting foreign investors. Government should try to address sector specific issues to raise the standards of performance. Although in light of these reforms, corporate governance has gained substantial ground in India, but this study does not find any significant impact of reforms on financial performance of the companies. As and when the corporate governance reforms are implemented in true spirit, the market sentiments would change and improve the relationship between corporate governance and firm performance in India similar to developed economies.

To cater to the problem of compliance and implementation of governance reforms in view of strong interference of bureaucracy and corruption in India, market regulators should be made more powerful and given a free hand to prosecute the companies involved in frauds. Also, high penalties should be imposed for non-adherence of mandatory requirements. Thus, the full implementation of governance reforms in India requires reforms to take place in larger context including political and legal systems. Moreover, the Indian companies need to understand the benefits of implementing good governance strategies and corresponding initiatives that help in improving financial performance as well.

This study has certain limitations. The annual reports have been reviewed multiple times to validate the reported aspects and achieve higher consistency while giving the rating score, still the subjectivity inherent in the rating scale remains a limitation. Additionally, financial data and corporate governance performance has been considered for two years and for top hundred companies only. Future study can extend this data for multiple years and investigate the relationship as a trend analysis for all ET500 companies. As the global investors are ready to pay premium to the companies who are investing in sustainable practices for stakeholders, even the domestic investors may also follow the same trend and attach more value to the well governed companies embracing corporate responsibility.

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Goel, P. Implications of corporate governance on financial performance: an analytical review of governance and social reporting reforms in India. AJSSR 3 , 4 (2018). https://doi.org/10.1186/s41180-018-0020-4

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