This article is written by Ishita Sapre, a B.A LL.B. (Hons.) student at the Institute of Law Nirma University, Ahmedabad (Gujarat).
Table of Contents
In India, corporate governance is drawn or heavily inspired by Anglo-American experience, practice, and literature. International corporate governance practices cannot be adopted as the market’s nature is very different in India compared to other countries. The issues such as the effect of ownership concentration on shareholder rights, the role of relationship-based activity between banks and non- banks corporations, the presence of promoters and insiders, etc. could not be solved by adopting the corporate governance practices going on in the international market.
The definitions of corporate governance vary widely. Corporate governance is a process or procedure or a set of rules and practices set up for an organization by which it is directed and controlled. The guidelines of corporate governance ensure that the interests, goals, and objectives of shareholders are protected so that they could add value to the company’s interest. Stakeholders include a variety of people, from executives to consumers, suppliers, financiers. The guidelines are formed so to ensure the stakeholders drive long term benefits. The board of directors of any company acts as a primary force thus plays an important role in influencing corporate governance. Bad corporate governance casts doubt on a company’s reliability, integrity, or obligation. Due to various high profile cases, there was a need to make corporate governance as transparent as possible as it affects the development of a country at a huge level. The cases of corporate governance failure are a Stock market scam, Ketan Parikh scam, Satyam scam, the UTI scam, all these were criticized severely by the shareholders.
Transparency is very important for the overall growth, stability, and profitability of the business. Furthermore, the need for good corporate governance increased with time due to the competition prevailing in the market amongst businesses in all the economic sectors, whether at the national or international levels. To protect the benefits of stakeholders and directors and only these people and the benefit of the company’s management, there was a need for a progressive regulation; thus, “The Companies Act, 2013” was introduced for the same benefit as mentioned. In Clause 49 of the Listing Agreement, corporate governance was guided before the introduction of the Companies Act of 2013. Good corporate governance is very important as any possessing the same has the highest level of confidence among the shareholders associated with the company. Also, good corporate governance proves to be an essential criterion for any institution outside the country to decide whether to invest in the company or not. “In India, the corporate practices emphasize mostly on the functions of audit and finances having legal, ethical, and moral implications for the business and its impact on the shareholders.”
Professor J.M. Clark described the competition as a dynamic concept in his paper on “Workable Competition”. According to him, “competition describes the kind of pressure persisting in the market, which must be exerted to penalize the laggards and to reward the enterprising, and in this way to promote the economic progress.”
Good corporate governance is needed as there is much competition in the market, and for a healthy competitive business environment, good corporate governance is of great importance. There is a direct nexus between the good corporate governance and competitive business environment, as the latter fuelling, influencing and impacting the former. Corporate governance needs to transform itself just to meet the level of competition. The competition also has a relation to the country’s economic development as there is no perfect competition prevailing in the market, as it is a hypothetical term. There is imperfect competition in the market where a firm engages in strategic behavior just to maximize the firm’s profits, thereby restricting competition and opportunities for the other. Therefore, there is a need for competition policies, laws, and regimes that maintain and encourage the competitive process with a view of promoting efficiency, which is economic and also the welfare of the consumers. The competitive policies aim to ensure that the rights of the consumers are secured and ensure good quality and competitive prices to its consumers or customers. In other words, it could be said that competition policies enhance competition, give primacy to market forces, allowing entry and exit, reduce controls, minimize regulation, etc. Most countries are, therefore, migrating to the competition-oriented, market- based policies. A good competitive business environment is needed not only for economic development but also for the country’s social development.
Competition regime varies from country to country. The objectives of competitive regimes vary across the countries, which could be seen from the competitive regime being followed in the country. But the common objectives present in the competitive legislative regime of all the countries are economic efficiency, consumer welfare, and public interest. According to the Competition Act, anti-competitive conduct relates to ‘external ‘behavior in the market. In any economy, competition ensures the highest level of consumer welfare and efficiencies in the market. In India, Competition Act, 2002, was enacted in January 2003, and the Competition Commission of India was established in 2003. The commission established is the enforcement authority of the said Act in India.
The competition also promotes allocative and productive efficiencies, innovation, consumer welfare, economic and political democracy. Competition is a condition for the competitiveness of the nation.
The competition law was enacted to prohibit anti-competitive practices, regulate potentially anti-competitive mergers, and prevent unwarranted government and regulatory intervention. More than a hundred countries have adopted modern competition laws. The Act provides for a commission having many objectives; few of them are elimination of anti-competitive practices, promotion and sustenance competition, protection of consumer’s interests, and also ensuring freedom of trade. In the competition Act of 2002, agreements having AAEC, which is ‘appreciable adverse effect on competition’ including cartels, is prohibited.
The examples of anti-competitive agreements include fixing of prices, limiting or controlling the production supply, technical development, refusal to deal, etc. to name a few. The abuses of a dominant position are also prohibited under the said Act. Dominance per se is not prohibited, but its abuse is. Dominance in the market could be determined through various factors such as market share, the share of competitors, entry barriers, size, and resources of enterprise or competitors. Abuse could be categorized into two, and they are exclusionary and exploitative. Exclusionary abuses include predatory pricing, denying market access, and dominance in one market to enter other relevant markets while exploitative include discriminatory price or condition. Competition Act is based on a liberalized regime, and the concept of competition is expressly defined, not like the MRTP Act, where the concepts of competition are not expressly defined.
In the end, it could be said that good governance is a prerequisite for competition. The competition offers enhancement of productivity at the industry level, generation of more employment, and lowering of consumer prices. The need for having a regulation which predominantly focuses on competition was felt in 1991 when India was embraced with the idea of globalization, privatization, and liberalization. Therefore, the old MRTP Act was amended. Later on, it was realized that the forces of competition are needed to be reinforced with a law termed as competition law. With the enactment of the said law, ideas such as ‘efficiency’ and ‘maximization of consumers’ welfare’ attained the central plank. At the micro-level, it could are understood that for firms to remain competitive, they are now required to adopt global strategies. On the one hand, it is important to ensure that privatization, liberalization, and globalization are enhancing the competition in the market, and on the one hand, there it is important to establish privatization liberalization and globalization competition in a globalized economy. Thus, corporate governance needs to be there to protect consumers’ interests and economic development, therefore, very closely related to competition policy.
Competition and corporate governance are interlinked to each other, as good corporate governance is very much needed in a competitive market. Transparency is very important for overall economic growth, stability, and profitability. There is a relevance of competition to corporate governance, which, in turn, impacts the economic and social development of the countries where the corporates are situated. For corporate governance, competition principles in policymaking should be inherited. The need for good corporate governance was felt after 1991, when the concept of globalization, privatization, and liberalization hit the country.
Corporate governance and consumer interest
All the activities of any corporate have a point which can be referred to as the consummating point, the presence of the consumer. According to the rule of corporate governance, the welfare of consumers is of utmost importance. Consumer welfare and interest aim at the charter of economic liberty, which is designed for preserving unaffected and free competition. The charter says that there should be unrestrained interaction of various factors such as competitive forces, maximum progress of material, and availability of good quality goods and services at a reasonable rate. At the micro-level, it was suggested that as a part of corporate governance, the firms should adopt the global strategies to remain competitive. In the market, it could be viewed that the size, number, and scope of activities are increasing day by day and so as the cross- border trade and international alliances. It could not be said that the corporate sector comprises only big companies or MNCs, but there is a presence of small and medium industries; therefore, corporate governance is not only of those bog companies or MNCs but also of small and medium enterprises. But because of the size MNCs, they could incorporate anti-competitive practices in their governance. Thus, it could be said that corporate governance should be in a way where the market is driven by competition and the interests of the consumers are well protected.
Role of corporate governance
It is generally said that corporate governance mostly focuses on the rights of the shareholders, conduct, and output of managers and the performance of directors. Encouragement of investors’ confidence is emphasized more. Good corporate governance helps in improving the quality of investment decisions. As the market is getting strengthened and also the competition regime in most of the countries, there was a need that was felt to introduce the competition regime having the concept of corporate governance being incorporated in it. Good corporate governance also influences the business environment as the environment plays an important role in determining the degree of competition prevailing amongst the firms. It also determines the level of competition, the rules of entry and exit in the market of any firm, and the openness in the economy. The business environment has a great impact on corporate incentives.
Challenges of business environment
The environment of business is determined by the behavior and conduct of the firms, as they account for a large number of shares of the market for goods and services. The environment is not considered to be good or competitive as factors like consolidation and concentration lead to monopoly and oligopoly. There should be effective control of the corporate affairs. Because of the milieu of the business environment, there is a need for good corporate governance. Many times, firms have a monopoly in the market; thus, they limit production or fix the prices of the products resulting in a bad competitive environment in the market.
Relation between competition and economic development
Competition is linked to economic development as the competition policy has benefits that promote efficiency in international trade and welfare of the consumers, thus, helping in attaining the economic development of the country. The principles of competition policies mainly focus on “greater production, allocative and dynamic efficiency, welfare and growth”.
It is also viewed that producer welfare, in addition to consumer welfare, economic growth, and the competition persisting in international trade, are all the outcomes of competition policies being followed in the country and also the deregulation of restrictive business and trade practices. It is the only competition that increases the overall performance and rewards the good performance, encourages entrepreneurs to invest in the corporate sectors, increases the entry of new firms into the market, thereby promoting the overall economic efficiency of the forms or enterprises. It also reduces the cost of production, encourages the firms or corporations to improve their efficiency in terms of output being generated, thus, ensuring good quality products at a cheaper process or more reasonable prices. All these aspects, in the end, contribute to a great extent to the overall growth of the country and thereby fostering the economic development of the country. An example could be taken of the European Union, where the trade barriers were removed through the implementation of the policies, which, in the end, increased the overall income by 1.1 to 1.5 percent over a period of 1987-93 and also created around thirty thousand to nine thousand jobs. The implementation of the policy also reduced the rate of inflation by around 0.5- 1.00 percent. The changes can be attributed to the increase in competition and the greater improvement of efficiency in the market.
Restricted trade impedes good corporate governance
It is a known fact that competition influences and impacts the corporate governance to a great extent. The concept of globalization, liberalization, and privatization helps a lot to make the markets for goods and services competitive in nature. It is to be noted that if the business environment is competitive enough, then corporate governance could not afford to be slack for competitors. But when the competition is not optimum, rather it is sub-optimum or inadequate, corporate governance has a tendency to become loose and which in turn delays the decisions of business matters. Restricted trade practices, in any developing country, in the market of goods and services, can injure the interests of the consumers and thereby retarding the overall economic development of the country. As discussed earlier, it could be said that ownership concentration and consolidation, if get aggravated, may result in no competition or sub-optimal level of competition in the market of goods and services.
In the end, it could be inferred that competition and corporate governance have an interaction at various levels. Corporate governance should ensure that corporations are not indulged in anti-competitive activities. The main objective of the competition is to ensure a free and fair market and also to protect the interest of consumers and producers. It would definitely enhance economic freedom and low barriers to entry for new firms and competitors. Thus, it could be said that competition, development, and corporate governance are linked to each other.
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