Convergence in Corporate Governance: the Case of China and India

Author:A. Majumdar
Position:O.P. Jindal Global University (New Delhi, India)
BRICS LAW JOURNAL Volume VII (2020) Issue 1
O.P. Jindal Global University (New Delhi, India) 59-90
China and India face similar challenges in maintaining their aggressive rates of economic
growth. While both countries attained economic independence in the late 1940s, each
followed a dierent path in terms of growth. China preferred to open up its economy to
foreign direct investment much earlier and only in recent times has it turned towards
domestic capital. India, on the other hand, began by attempting to develop local talent
and shifted its focus to foreign participation in 1991. This paper examines the politico-
economic background and the resultant corporate governance paths undertaken by
each of these countries. These paths, while diverse, lead to a convergence. In particular,
given the nature of concentrated shareholdings in Chinese and Indian companies, by
the State in China and by family promoters in India, the second agency problem and
the requisite protection of minority shareholders assume considerable importance in
both jurisdictions. However, given the nature of corporate governance norms having
been transplanted from advanced economies to emerging economies, this convergence
may not be suitable or even desirable. This paper posits that emerging economies such
as China and India ought to develop and implement corporate governance norms that
are separate from those of advanced economies to combat the unique issues arising out
of shareholding patterns at home.
Keywords: corporate governance; company law; China; India.
Recommended citation: Arjya Majumdar, Convergence in Corporate Governance:
The Case of China and India, 7(1) BRICS Law Journal 59–90 (2020).
BRICS LAW JOURNAL Volume VII (2020) Issue 1 60
Table of Contents
1. Political and Economic Background
1.1. China
1.2. India
2. An Analysis of Existing Corporate Governance Norms
2.1. China
2.2. India
3. Convergence in the Positions of India and China
4. The Case for Divergence
India and China face similar challenges in maintaining their aggressive rates
of economic growth. While both states as we k now them today came into being
at mid-20th century, each has followed a dierent path in terms of its economic
and scal policy. China continues to follow a mostly state-centric approach to
economic development which at the same time allows the infusion of foreign direct
investment (FDI) in the country’s nancial system. India, conversely, allows private
participation in the economy, but was until recently reluctant to open up its doors
to foreign participation.1 While China outpaces India in terms of growth rate, there
are comparatively few indigenous Chinese rms that are internationally competitive.
Indian rms, on the other hand, are internationally competitive and enjoy a global
presence thanks to the focus in India on the development of local talent.
One of the key indicators of sustain able economic growth is that of good
corporate governance and its implementation. In terms of backgrounds, both
countries have considerable dissimilarities in their approach towards corporate
India follows a system of family capitalism – one of the most common structures
of corporate governance2 – demonstrated by concentrated shareholdings in large
corporations by wealthy families. Respected business families can leverage their
reputations by controlling many listed companies, and subsequently by having
listed companies they hold control blocks of other listed companies, in successive
1 Srabani Roy Choudhury, Japan’s Foreign Direct Investment Experiences in India: Lessons Learnt from Firm
Level Surveys, Indian Council for Research on International Economic Relations, Working Paper No. 243
(December 2009) (Jan. 4, 2020), available at; see also Tirupati N.
Srinivasan, Integrating India with the World Economy: Progress, Problems and Prospects (2001) (Jan. 4, 2020),
available at
2 Rafael La Porta et al., Corporate Ownership Around the World, 54(2) Journal of Finance 471 (1999).
tiers of intercorporate ownership. Such pyramidal business groups are common in
countries where investors’ legal rights are weak.3
On the other hand, China follows a form of state capitalism, wherein public
ocials supervise corporate managers and intervene to correct any governance
problems.4 If the bureaucratic overseers are able and altruistic, they can direct
corporate decision-making down paths that promote the general good. On the other
hand, intractable governance problems arise if the public ocials have inadequate
ability or knowledge to make such decisions, or skew decisions to benet politically
favored persons or groups.
Corporate governance is critically important to a country’s economic growth and
stability because it provides the credibility and condence that is fundamental to
capital markets.5 There are two main categories of shareholders: (a) the promoter
and the promoter group and (b) the public shareholding (nancial institutions,
companies and individuals). For investors to trust a company enough to buy its
securities, they need reassurance that the company will be run eciently and in
a transparent manner. This is where corporate governance becomes critical.6
Despite the dierences between the corporate governance mechanisms followed
in India and China, there seems to be a common ground in terms of establishing
corporate governance norms in both countries – that of concentrated shareholding
wherein the majority of the shares are held by one individual or a group of
individuals.7 This convergence is attributable in no small measure to the inuence
of the Sarbanes-Oxley Act of 2002 passed in the United States of America and the
Cadbury Committee Report in the United Kingdom.8
This paper is divided into three parts. The rst part examines the political and
economic background and the resultant corporate governance paths undertaken
by India and China and posits that these paths, while diverse, necessarily lead to
a convergence. The second part describes the eorts made by the Chinese and Indian
legislatures to mitigate agency problems in rms and argues that the second agency
3 Randall K. Morck & Lloyd Steier, The Global History of Corporate Governance: An Introduction, National
Bureau of Economic Research, Working Paper No. 11062 (November 2005).
4 William Goetzmann & Elisabeth Köll, The History of Corporate Ownership in China: State Patronage, Company
Legislation, and the Issue of Control in A History of Corporate Governance Around the World: Family Business
Groups to Professional Managers 149 (R.K. Morck (ed.), Chicago: University of Chicago Press, 2005).
5 Yong Kang et al., Chinese Corporate Governance: History and Institutional Framework (Santa Monica,
CA: RAND Corporation, 2008).
6 A History of Corporate Governance Around the World, supra note 4, at 5.
7 Tarun Khanna & Krishna G. Palepu, The Evolution of Concentrated Ownership in India: Broad Patterns
and a History of the Indian Software Industr y in A History of Corporate Governance Around the World,
supra note 4, at 83.
8 Adrian Cadbury, The Financial Aspects of Corporate Governance (London: The Committee on the
Financial Aspects of Corporate Governance and Gee and Co. Ltd., 1992).

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