III. HISTORY OF CORPORATE GOVERNANCE IN INDIA A.

PRE-LIBERALIZATION When India attained independence from British rule in 1947, the country was poor, with an average per-capita annual income under thirty dollars. (49) However, it still possessed sophisticated laws regarding "listing, trading, and settlements." (50) It even had four fully operational stock exchanges. (51) Subsequent laws, such as the 1956 Companies Act, further solidified the rights of investors. (52) In the decades following India's independence from Great Britain, the country turned away from its capitalist past and embraced socialism. (53) The 1951 Industries Act (54) was a step in this direction, requiring "that all industrial units obtain licenses from the central government." (55) The 1956 Industrial Policy Resolution (56) "stipulated that the public sector would dominate the economy." (57) To put this plan into effect, the Indian government created enormous stateowned enterprises, (58) and India steadily moved toward a culture of "corruption, nepotism and inefficiency." (59) As the government took over floundering private enterprises and rejuvenated them, it essentially "convert[ed] private bankruptcy to high-cost public debt." (60) One scholar referred to India's economic history as "the institutionalization of inefficiency." (61) The absence of a corporate-governance framework exacerbated the situation. Government accountability was minimal, and the few private companies that remained on India's business landscape enjoyed free reign with respect to most laws; the government rarely initiated punitive action, even for nonconformity with basic governance laws. (62) Boards of directors invariably were staffed by friends or relatives of management, and abuses by dominant shareholders and management were commonplace. (63) India's equity markets "were not liquid or sophisticated enough" to punish these abuses. (64) Scholars believe that "takeover threats act as [a] disciplining mechanism to poorly performing companies" (65) because as the stock price of poorly governed firms decreases (because disgruntled investors discard stock), the firms become susceptible to hostile-takeover attempts. (66) Thus, "the fear of a takeover ... is supposed to keep the management honest." (67) However, until recently, hostile takeovers were almost entirely non-existent in India, (68) and therefore, the poorly governed Indian firms had little to worry about in terms of following corporate laws once they had raised capital through their initial public offering. Thus, corporate governance in India was in a dismal condition by the early 1990s. B. POST-LIBERALIZATION In 1999, in a defining moment in India's corporate-governance history, the Indian Parliament created the Securities and Exchange Board of India ("SEBI") to "protect the interests of investors in securities and to promote the development of, and to regulate[,] the securities market." (69) In the years leading up to 2000, as Indian enterprises turned to the stock market for capital, (70) it became important to ensure good corporate governance industry-wide. (71) Additionally, a plethora of scams rocked the Indian business scene, (72) and corporate governance emerged as a solution to the problem of unscrupulous corporate behavior.

In 1998, the Confederation of Indian Industry ("CII"), "India's premier business association," (73) unveiled India's first code of corporate governance. (74) However, since the Code's adoption was voluntary, few firms embraced it. (75) Soon after, SEBI appointed the Birla Committee (76) to fashion a code of corporate governance. (77) In 2000, SEBI accepted the recommendations of the Birla Committee and introduced Clause 49 into the Listing Agreement of Stock Exchanges. Clause 49 outlines requirements vis-a-vis corporate governance in exchange-traded companies. (78) In 2003, SEBI instituted the Murthy Committee (79) to scrutinize India's corporategovernance framework further and to make additional recommendations to enhance its effectiveness. (80) SEBI has since incorporated the recommendations of the Murthy Committee, and the latest revisions to Clause 49 became law on January 1, 2006. (81) II. Why Corporate Governance? Investors primarily consider two variables before making investment decisions-the rate of return on invested capital and the risk associated with the investment.13 In recent years, the "attractiveness of developing nations" as a destination for foreign capital has increased, partly because of the high likelihood of obtaining robust returns and partly because of the decreasing "attractiveness of developed nations."14 The lure of achieving a high rate of return, however, does not, by itself, guarantee foreign investment; the attendant risk15 weighs equally in an investor's decision-making calculus.16 Good corporate-governance practices reduce this risk by ensuring transparency, accountability, and enforceability in the marketplace.17 While strong corporate-governance systems help ensure a country's long-term success, weak systems often lead to serious problems. For example, weak institutions caused, at least in part, the debilitating 1997 East Asian economic crisis.18 The crisis was characterized by plummeting stock and real-estate prices, as well as a severe erosion of investor confidence.19 The total indebtedness of the countries20 affected by the crisis exceeded one-hundred billion dollars.21 While the presence of a good corporate-governance framework ensures neither stability nor success,22 it is widely believed that corporate governance can "raise efficiency and growth," especially for countries that rely heavily on stock markets to raise capital.23 In fact, some contend that the "Asian financial crisis gave developing countries . . . a lesson on the importance of a sound corporate governance system."24 In an open market, investors choose from a variety of investment vehicles.25 The existence of a corporate-governance system is likely a part of this decision-making process. In such a scenario, firms that are "more open and transparent,"26 and thus well governed, are more likely to raise capital successfully because investors will have "the information and confidence necessary for them to lend funds directly" to such firms.27 Moreover, well-governed firms likely will obtain capital more cheaply than firms that have poor corporate-governance practices because investors will require a smaller "risk premium" for investing in well-governed firms.28