Though the above detailed analysis of shareholders rights as stressed by the Companies Act, other
statues and various committees give any investor or the reader the impression that there are
enough provisions in the laws of the land, there has hardly been any conviction under them all these
years. The liberalization of the Indian economy since 1991 seems to have opened the floodgates of
scams and provided vast opportunities to fly-by-night operators. These have destroyed shareholder
values. As a result of some scams such as those involving UTI, non-banking finance companies,
plantations and vanishing companies, millions of small investors lost their savings and investments.
The plight of millions of such small shareholders was indeed pitiable and heart-rending. Most of
them, especially those who invested in non-banking financial companies (NBFCs), lost their lifeearnings and were driven to the street penniless. In spite of such misery caused to the poor investors
and the high dent in their confidence, the government and regulatory authorities were grinding too
slowly and did nothing to trace and penalize the scamsters or retrieve from them and return the
poor investors money.
Since 1990, more than INR 600,000 million was collected from prospective shareholders by several
companies that did the vanishing trick. Though their names are posted on the World Wide Web,
none of the directors or promoters has been prosecuted either by the Registrar of Companies or the
SEBI who can file criminal complaints against them under Section 621 of the Companies Act.
Directors and promoters can be made personally liable for false statements found in the prospectus.
Apart from civil liability, Section 63 of the Companies Act stipulates that persons issuing false or
untrue statements will be punishable with imprisonment for two years. Section 68 stipulates that
any person who dishonestly induces other persons to subscribe for shares or debentures can be
imprisoned for five years. But neither the government nor SEBI has thought it fit to prosecute these
scamsters for more than a decade.2 However, it is heartening to note that recently, after a decade
of inactivity the ministry has cracked the whip on vanishing companies.
Prioritizing investor protection, particularly small investors, the Ministry of Company Affairs (MCA)
has initiated prosecutions against vanishing companies under the Companies Act as well as other
legislations. According to a spokesman of the MCA: On review of the ongoing actions against the
vanishing companies, those companies who came up with public issues during 199394 and 199495
and vanished with public money, focus has been laid on taking timely and effective action against
such companies, their promoters and directors.3 Besides, launching prosecutions under the
Companies Act, action has been taken against such entities by way of registering first information
report (FIR) under Indian Penal Code, and vigorously pursuing the prosecutions already launched.
In its report, the Special Cell on Vanishing Companies in the Ministry has stated that out of the 52
vanishing companies cases in the western region, prosecutions have been filed against 48
companies, while the remaining four are under liquidation. In fact, in the case of Maa Leafin &
Capital Ltd, the accused has been convicted for non-filing of statutory return,4 a Ministry official
said. Further, FIRs have been launched against 40 companies, of which 28 have been registered. In
the case of Trith Plastic Ltd of Gujarat, charge-sheet has been filed in the court and directors of the
company have been arrested.
Of the 36 cases in the southern region, prosecutions have been filed against 32. For non-filing
statutory returns, 21 prosecutions have been filed while FIRs have been filed against 19 companies.
Of the 19 FIRs launched, nine have been registered. In the case of one company, Global Property Ltd,
public issue money has been refunded.
In the northern region, prosecutions have been filed against all 20 vanishing companies. In the case
of Simplex Holdings, the accused have been convicted. For non-filing of statutory returns, 19
prosecutions have been filed. In case of Dee Kartvya Finance Ltd, the accused has been convicted
and fined. FIRs have been filed against 15 companies of which four have been registered.
In the eastern region, of the 14 vanishing companies cases, prosecutions have been filed against 11
companies. The remaining three are under liquidation. FIRs have been filed in all 14 cases of which
13 have been registered. Further, 11 prosecutions have been filed for non-filing of statutory returns.
In case of Cilson Organics Ltd, the managing director of the company has been convicted and a fine
of INR 14,000 has been imposed.
However, it should be remembered that it has taken more than a decade for the government to
initiate legal action against the scamsters. Besides, it should be kept in mind that the slow-grinding
judicial processes will take its own time and if past experience is any guidance, it will take another
decade or more at the fastest, to get the judgement. Even then, there is no guarantee that the guilty
will be convicted and the poor investors money returned. This is the state of affairs that has caused
untold misery to the poor Indian shareholder/investor.
The SEBINCAER study12 estimated that the investor population in India was 12.8 million or nearly 8
per cent of all Indian households. The bulk of the increase in the number of shareholders had taken
place during the boom years 19901994 and tapered off thereafter. By 1997 the capital market
bubble had burst. The Household Investors Survey of SCMRD (1997) revealed the following: (i) a
majority of investors reported unsatisfactory experience of equity-investing; (ii) 80 per cent of the
investors said that they had little or no confidence in company managements; (iii) 55 per cent
respondents showed little or no confidence on the market regulator, SEBI; and (iv) most preferred
saving instruments and government saving schemes and banks fixed depositors. This reflected a
considerable erosion of investor confidence in securities and corporations. Many subsequent
investor surveys also found broadly the same investor reactions.
All these surveys underlined the need for restoring the investors confidence in private corporations,
which enjoy little credibility with investors who have badly burnt their fingers in a series of scams.
This calls for a credible programme of corporate governance reform, focusing on outside minority
shareholder protection. The situation does not seem to have changed much today notwithstanding
the CIIs code and SEBIs guidelines and is the reason why investors prefer government securities
rather than corporate securities. The sooner this trend is reversed, the better it will be for the
development of the capital market in the country.
There is a need for a specific Act to protect investor interest. The Act should codify, amend and
consolidate laws and practices for the purpose of protecting investors interest in corporate
investment;
Establishment of a judicial forum and award of compensation for aggrieved investors;
Investor Education and Protection Fund which is under the Companies Act should be shifted to the
SEBI Act and be administered by SEBI;
SEBI should be the only capital market regulator, clothed with the powers of investigation;
The regulator, SEBI should require all IPOs to be insured under third party insurance with differential
premium based on the risk study by the insurance company;
SEBI Act, 1992, should be amended to provide for statutory standing committees on investors
protection, market operation and standard setting; and
The Securities Contracts (Regulation) Act, 1956, should be amended to provide for corporatization
and good governance of stock exchanges.
Against member-brokers of stock exchanges: Complaints of this category generally centre around
the price, quantity etc at which transactions are put through defective delivery, delayed payments or
nonpayments from brokers.
Against companies listed for trading on stock exchanges: Complaints against companies generally
centre around non-receipt of allotment letters, refund orders, non-receipts of dividends, interest,
etc.
Complaints against financial intermediaries: These complaints may be against sub-brokers, agents,
merchant bankers, and issue managers and generally centre around non-delivery of securities and
non-settlement of payment due to investors. However, these complaints cannot be entertained by
the stock exchanges, as per their rules.
Inventory Information Centres have been set up in every recognized stock exchange which in
addition to the complaints related to the securities traded/listed with them, will take up all other
complaints regarding the trades effected in the exchange and the relevant member of the exchange.
Moreover, two other avenues always available to the investor to seek redressal of his or her
complaints are
Implementation of steps that will ensure lasting shareholder value will vary among companies
depending to a large extent on top management support, the nature and diversity of the business
portfolio, the degree of decentralization and on its size, global reach, employee mix, culture,
management style and the sense of urgency. However, bringing about long term shareholder value
is the right thing to do and competitive pressures, greater awareness among shareholders,
government regulations and institutional shareholders seeking maximum returns will ensure that
the redressal system is there to stay.
Source: Securities and Exchange Board of India, A Reference Guide for Investors on Their Rights and
Responsibilities, 1997. Reproduced with permission from the Securities and Exchange Board of India.
Loss of investor confidence due to these scandals that conveyed an image of fraud and manipulation
was so great that even after several years of moribund stock market, things have not improved.
The series of scams has cast a shadow over the credibility of SEBI, and its capacity to create a safe
and sound equity market.
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SEBIS POOR PERFORMANCE AND SUGGESTIONS FOR IMPROVEMENT
The SEBI, the designated capital market regulator has a sort of mixed record in fostering and
nurturing corporate governance in the Indian corporate sector. Since its inception in 1992, SEBI has
registered substantial growth in its stature and reach. Presently, its regulatory framework is robust.
It has also played a significant role in creating the countrys capital market infrastructure that is
recognized as one of the more advanced in the world. If SEBIs growth and reach over the past five
years have been significant, its failure too has been spectacular. S. Vaidya Nathan lists the following
failures:13
Poor tackling of price manipulation and insider trading issues: Insider trading and price
manipulation ahead of key corporate actions still continue to be rampant. SEBI has not effectively
tackledunlike its American counterpart SECissues such as price manipulation and insider trading.
It has to strengthen enforcement and surveillance and impose deterrent penalties to stop these
wrong-doings.
Poor conviction rate: A regulators credibility hinges on its ability to achieve a fairly high conviction
rate against errant market players. However, SEBI has not been able to penalize effectively violators
of various corporate laws. In most cases, the appellate authority SAT has set aside SEBIs penal
measures against top market players for violation of its laws. It is necessary for SEBI to build up
strong cases with impeccable evidences to ensure conviction of market violators, rather than let
them go scot free because of SATs intervention.
Need to enhance its manpower skills: SEBI, as a capital market regulator, lacks the required
manpower with necessary skill sets, especially in areas such as financial services, legal acumen,
knowledge of various business functions, etc. to carry out its regulatory functions efficiently. It needs
to invest heavily in the recruitment and training of such qualified manpower. SEBI has to build a
coterie of professionals of competence, honesty and integrity.
It should simplify and trim regulations: SEBI has to simplify and trim the regulations, so that they are
compact, easy to follow and comprehend. There is an urgent need for SEBI to place in the public
domain in good time the large number of reports filed by innumerable market players, corporations
and institutions in the process of complying with its regulations. This will facilitate analysts chronicle
and spot market trends in different areas. Such efforts would enhance and compliment SEBIs
attempts to regulate the market effectively.
It should tone up quality of disclosures: It is also necessary to improve the quality of SEBIs
disclosures with a view to providing more useful information to investors, especially in matters of
mergers and acquisitions, earnings of companies and FII inflows. It is also important that SEBI
streamlines its thus far poorly managed Web site www.sebi.gov.in/ so that it is made into a valuable
source of information.
It should solve issues of IPOs and mutualfunds: There are a host of other issues it has to tackle, such
as confusion over the clearance of IPOs in the INR 200 million range; ensure that SEBI files and
maintains its internal databases accurately and efficiently; and formally shelf the move to convert
the Association of Mutual Funds of India into a self-regulatory organization, as the time for it has not
come and such a move could lead to conflicts of interest with SEBI itself.
The foregoing analysis clearly shows that though SEBI has emerged as the one and only capital
market regulator in the country, its functioning has been ineffective so far due to its failure to
exercise its authority and bring to book the violators and the wrong-doers. It has also let itself to be
influenced unduly and unjustifiably by some corporate big-wigs. Therefore SEBI badly needs to
improve administration and accountability and restore its credibility as a powerful regulator.
SUMMARY
The phenomenal growth of modern corporations, have brought about the kind and order of material
wealth to the international community that was never possible a few years ago. But this growth was
possible, due to the evolution of public limited or joint stock companies, which are most attractive to
investors. In such organizations, financial liability of the shareholders is limited to the extent of the
shares held by them. However, the investor needs to be protected from insiders as he is not involved
in the day-to-day management of the company. To realize such an investor protection, countries
have evolved rules, regulations, systems and mechanismsboth internal (to the company) and
external.
There is a global consensus about the objective of good corporate governance: maximizing longterm shareholder value. The members of a company enjoy various rights in relation to the company.
These rights are conferred on them either by the Indian Companies Act of 1956 or by the
Memorandum and Articles of Association of the company or by the general law, especially those
relating to contracts under the Indian Contract Act, 1872.
Various committees have been set up both in India and elsewhere to guide the shareholders with
regard to good corporate governance, especially their long term interests. The Working Group on
the Companies Act set up by the Government of India recommended many financial as well as nonfinancial disclosures. The objective of the CII was to develop and promote the Desirable Code of
Corporate Governance, corporate governance to be adopted and followed by Indian companies. The
SEBI, as the custodian of investor interests constituted an 18-member committee, chaired by Kumar
Mangalam Birla. The committee made 25 recommendations, 19 of them mandatory, that is, these
were enforceable. The Naresh Chandra Committees report on Audit and Corporate Governance
has taken forward the recommendations of the Birla Committee. Two major issues the committee
addressed and made appropriate recommendations were: representation of independent directors
on a companys board, and the composition of the audit committee
Recent research confirms that an essential feature of good corporate governance is strong investor
protection. The insidersboth managers and controlling shareholderscan expropriate the
investors in a variety of ways. Investor protection is not attainable without adequate and reliable
corporate information. There are rules and regulations that are designed to protect investors. The
objective of the corporate is to protect the rights of outside investors, including both shareholders
and creditors. In many countries, firms are owned and controlled by promoter families and in such
closely held firms, insiders use every opportunity to abuse the rights of other shareholders and steal
their profits through devious means. Investor protection provides an impetus for the growth of
capital markets. Due to lack of proper investor protection, the capital market in India has
experienced a stream of market irregularities and scandals in the 1990s. There are several agencies
in India that are expected to protect investors. These include the SEBI, Department of Company
Affairs, Department of Economic Affairs, Reserve Bank of India, Consumer Courts and Courts of Law.
An objective analysis of the problems faced byinvestors in countries like India, leading to an erosion
of their confidence in the capital market with the attendant adverse impact on the economic
growth, shows that the major problems arise due to corporate misgovernance and not due to minor
aberrations in following the procedures set by SEBI. To rectify such a situation, actions that lead to
corporate misgovernance should be codified and small investors provided with statutory rights to
enforce civil liability against the directors whose misdeeds and non-application of minds in
investment or other decisions have adversely impacted the company and its shareholders. Some of
the misdeeds would include (i) breach of fiduciary duty; (ii) siphoning off corporate funds; (iii)
misapplication of companys funds; (iv) price manipulation or insider trading; (v) manipulation of
accounts; (vi) failure to disclose conflicts of interests; (vii) fraud or cheating; (viii) misappropriation of
corporate assets; and (ix) losses caused due to mismanagement or negligence.
To receive the share certificates on allotment or transfer as the case may be in due time.
To receive copies of the Annual Report, the Balance Sheet and the Profit & Loss Account and the
Auditors Report.
To participate and vote in general meetings either personally or through proxies.
To receive dividends in due time once approved in general meetings.
To receive corporate benefits such as rights, bonus etc. once approved.
To apply to Company Law Board (CLB) to call or direct the Annual General Meeting.
To inspect the minute books of the general meetings and to receive copies thereof.
To proceed against the company by way of civil or criminal proceedings.
To apply for the winding-up of the company.
To receive the residual proceeds.
Besides the above rights one enjoys as an individual shareholder, one also enjoys the following rights
as a group of shareholders:
Shareholders responsibilities
While a shareholder may be happy to note that he/she has so many rights as a stakeholder in the
company, one should not be complacent; because one also has certain responsibilities to discharge,
such as
To remain informed.
To be vigilant.
To participate and vote in general meetings.
To exercise ones rights on ones own, or as a group.
Trading of securities
A shareholder has the right to sell securities that he/she holds at a price and time that he/she may
choose. He/she can do so personally with another person or through a recognized stock exchange.
Similarly, he/she has the right to buy securities from anyone or through a recognized stock exchange
at a mutually acceptable price and time.
Whether it is a sale or purchase of securities effected directly by him or through an exchange, all
trades should be executed by a valid, duly completed and stamped transfer deed.
If he/she chooses to deal (buy or sell) directly with another person, he/she is exposed to counter
party risk, i.e., the risk of non-performance by that party. However, if he/she deals through a stock
exchange, this counter party risk is reduced due to trade/settlement guarantee offered by the stock
exchange mechanism. Further, he/she also has certain protections against defaults by his/her
broker.
When one operates through an exchange, one has the right to receive the best price prevailing at
that time for the trade and the right to receive the money or the shares on time. He/she also has the
right to receive a contract note from the broker confirming the trade and indicating the time of
execution of the order and necessary details of the trade, and the right to receive good rectification
of bad delivery. If he/she has a dispute with his/her broker, he/she can resolve it through arbitration
under the aegis of the exchange.
If an investor decides to operate through an exchange, he/she has to avail the services of a SEBIregistered broker/sub-broker. He/she has to enter into a broker-client agreement and file a client
registration form. Since the contract note is a legally enforceable document, he/she should insist on
receiving it. He/she has the obligation to deliver the shares in case of sale or pay the money in case
of purchase within the time prescribed. In case of bad delivery of securities by the shareholder,
he/she has the responsibility to rectify them or replace them with good ones.
Transfer of securities
Transfer of securities means that the company has recorded in its books a change in the title of
ownership of the securities effected either privately or through an exchange transaction. To effect a
transfer, the securities should be sent to the company along with a valid, duly executed and stamped
transfer deed duly signed by or on behalf of the transferor (seller) and transferee (buyer). It would
be proper to retain photo-copies of the securities and the transfer deed when they are sent to the
company for transfer. It is essential that one sends them by registered post with acknowledgement
due and watch out for the receipt of the acknowledgement card. If one does not receive the
confirmation of receipt within a reasonable period, one should immediately approach the postal
authorities for confirmation.
Sometimes, for an investors own convenience, he/she may choose not to transfer the securities
immediately. This may facilitate easy and quick selling of the securities. In that case, he/she should
take care that the transfer deed remains valid. However, in order to avail the corporate benefits
such as dividends, bonus or rights from the company, it is essential that he/she gets the securities
transferred in his/her name and become a shareholder.
On receipt of the investors request for transfer, the company proceeds to transfer the securities as
per the provisions of the law. In case it cannot effect the transfer, the company returns the securities
giving details of the grounds under which the transfer could not be effected. This is known as
Company Objection.
When an investors happens to receive a company objection for transfer, he/she should proceed to
get the errors/discrepancies corrected. He/she may have to contact the transferor (the seller) either
directly or through his/her broker for rectification or replacement with good securities. Then he/she
can resubmit the securities and the transfer deed to the company for effecting the transfer. In case
he/she is unable to get the errors rectified or get them replaced, he/she can take recourse to the
seller and his/her broker through the stock exchange to get back his/her money. However, if one
had transacted directly with the seller originally, one has to settle the matter with the seller directly.
Sometimes, ones securities may be lost or misplaced. One should immediately request the company
to record a stop transfer of the securities and simultaneously apply for issue of duplicate securities.
For effecting stop transfer, the company may require to produce a court order or the copy of the FIR
filled by him with the police. Further, to issue duplicate securities to him, the company may require
him to submit indemnity bonds, affidavit, sureties etc. besides issue of a public notice. He/she had to
comply with these requirements in order to protect his/her interest.
Sometimes, it may so happen that the securities are lost in transit either from the shareholder to the
company or from the company to him/her. He/she has to be on his/her guard and write to the
company within a month of his/her sending the securities to the company. As soon as it is noticed
that either the company has not received the securities that was sent or he/she did not receive the
securities that the company claims to have sent to him/her, he/she should immediately request the
company to stop transfer and proceed to apply for duplicate securities.
A depository is a system which holds shares in the form of electronic accounts in the same way a
bank holds ones money in a savings account.
desires and get his/her shares reconverted into paper form. This reverse process is known as rematerialization.
Share transactions (such as sale or purchase and transfer/transmission etc.) in the electronic form
can be effected in a much simpler and faster way. All one needs to do is that after confirmation of
sales/purchase transaction by ones broker, one should approach his/her DP with a request to
debit/credit his/her account for the transaction. The Depository will immediately arrange to
complete the transaction by updating his/her account. There is no need for separate communication
to the company to register the transfer.
Source: Securities and Exchange Board of India, A Reference Guide for Investors on Their Rights and
Responsibilities, 1997. Reproduced with permission from the Securities and Exchange Board of
India.rities he or she holds in the firm. At the same time, while he or she makes an investment
decision the investor would have obviously taken note of and evaluated the attendant risks that go
with such expectations, especially the possibility of the risk that the income and/or capital growth
may not materialize. This mismatch between the expectations of the investors and the unexpected
final outcome in terms of income and/or capital growth arises mainly because their hard earned
money is entrusted to managers in a corporation whose investment decisions, apart from carrying
certain risks of their own, may not match those of the investors.
the firms profits, whereas if the investors interests are well taken care of, it will be difficult to do
the same.
The insiders, both managers and controlling shareholders, can expropriate the investors in a variety
of ways. Rafael La Porta et al.8 (1999), describe several means by which the insiders siphon off the
investors funds. In some countries, the insiders of the firm simply steal the earnings. These
arrangements take various forms. Sometimes, major shareholders who control the company and
their managers resort to underselling the output investors, to units they own. Such malpractices are
nothing short of thefts. There are other instances where unfit or under-qualified family members are
appointed to senior perks management positions with excessive pay and perks. In all these
instances, it is clear that the insiders use the profits of the firm to benefit themselves (either as
excessive executive salaries or in the form unjustifiable perquisites) instead of returning the money
to outside investors to whom it legitimately belongs. In this context, minority shareholders and
creditors are far more vulnerable. Expropriation also is done by insider selling additional securities in
the firm they control to another firm or subsidiaries they own at below market prices, with
assistance from obliging interlocking directorates, and also by diverting corporate opportunities to
subsidiaries and so on. Such practices, though often legal, have the same effect as theft. However, it
must be stressed that these sharp practices of insiders vary from country to country depending on
the existence or non-existence of democratic and corporate values, maturity or otherwise of the
securities market, financial systems, pace of new security issues, corporate ownership structures,
dividend policies, efficiency of investment allocation, the legal system and the competence of the
securities market regulator.
There are, however, rules and regulations that are designed to protect investors. Some of the
important regulations are with regard to disclosure and accounting standards, which provide
investors with the information they need to exercise other rights of investors such as the ability to
receive dividends on pro-rata terms, to vote for directors, to participate in shareholders meeting, to
subscribe to new issues of securities on the same terms as the insiders, to sue directors for
suspected wrongdoing including expropriation, to call extraordinary shareholders meeting, etc. Laws
protecting creditors largely deal with bankruptcy procedures and include measures which enable
creditors to repossess collateral, protect their seniority and make it harder for firms to seek court
protection in reorganization. In different jurisdictions, rules protecting investors come differently
from various sources, including not only company, security, bankruptcy, takeover and competition
laws but also stock exchange regulations and accounting standards. In India, for instance, rules
protecting investors emanate from the Department of Company Affairs of the Ministry of Finance,
the SEBI, the Listing Agreements of Stock Exchanges, Accounting Standards of the ICAI, and
sometimes decisions of the Superior Court of the country. It should be stressed though that the
enforcement of laws by these agencies are as crucial as their content and in most emerging
economies these are lax, delayed and dilatory, resulting in poor corporate governance.
The importance of legal rules and regulations as a means to protect outside investors against insider
expropriation of their money is in sharp contrast to the traditional laws and economies perspective
and has evolved over the past 45 years. As per this line of argument, financial market regulations are
deemed unwanted, because most financial contracts are entered into between professional issuers
and well-versed and knowledgeable investors. Investors generally know that there is a risk of
expropriation of their investment by insiders. To avoid such occurrence, they would expect firms to
contractually disclose financial and information about them routinely. If firms fail to abide by such
contractual obligation, investors penalize them through the securities market. Entrepreneurs know
this well and treat investors well by disclosing to them all relevant information besides limiting
expropriation. It is the considered view of some authorities on the subject that under circumstances
of enforcements of such contracts between issuers and investors, financial market regulation
becomes unnecessary.9
A case in point is Russia, which has a good securities law, a good bankruptcy law and an equally good
company law in books. Its Securities and Exchange Commission too is independent and aggressive
but relatively has few enforcement powers. With an ineffective judiciary and weak enforcement of
law, Russias financial market has not grown in an environment where blatant violations of the law
are far too common.
So, in reality, laws and their enforcement are the major factors that help outsiders to invest in
corporate firms. Although the reputation and goodwill of a firm do help it raise funds, law and its
enforcement are the clinching factors to decide on investment. It is an indisputable fact that to a
large extent shareholders and creditors decide to invest in firms because their rights are protected
by the law. The outside investors are more vulnerable to expropriation, and therefore, more
dependent on law, than their employees or the suppliers, who are useful to them and also have
reliable source of information to ward off any problems and are at a lesser risk of being mistreated.
Besides, available evidence also suggests that in countries where there is poor investor protection
there may be a need to change many more rules simultaneously to bring them up to best corporate
governance practice. But this may not be easy as families controlling corporations may object to
these reforms. Therefore, law and its enforcement are important means to protect investors and
help promote corporate governance.
Therefore, the available evidence on corporate ownership patterns around the world supports
strongly the importance of investor protection. Evidence also shows that countries with poor
investor protection have more concentrated control of firms than countries with good investor
protection.
Studies made by various researchers testify to the fact that in countries where there is a
concentration of ownership in the hands of few families, there may be stiff opposition to legal
reforms that are likely to reduce their control over firms and promote investor protection. From the
promoter families standpoint, legal reforms that will enhance the rights of outside investors, would
cause a reduction over their control of the firms and a marked decline in opportunities for
expropriation. This, in turn, will promote the total value of the firm and prompt investors finance
new projects on more attractive terms. The ultimate impact of the legal reforms will be a massive
redistribution of insiders wealth to outside investors. It is no wonder, therefore, that insiders
(promoter families) from many parts of the world, where they are prevalent, are opposed to legal
reforms, be it in Asia, Latin America, or Europe.10 According to these researchers, there is also
another reason why the insiders in such firms are opposed to reforms and the expansion of capital
markets. Under the existing conditions, these firms can finance their own investment projects
internally or through captive banks or subsidiary financial institutions. Studies show that a large
chunk of credit goes to the few largest firms in countries with poor investor protection. This was also
the case in India as R. K. Hazari and his researchers found out in the early 1960s. Even recently as
late as in 2001, it was found out that there has been a rapid expansion of assets and turnover of
industrial houses owned by families and there is a massive concentration at the top. The assets of
the Ambanis of Reliance, the Munjals of the Hero group, Shiv Nadar of HCL Technologies, Tatas,
Birlas, Jindals, R. P. Goenka, Azim Premji of Wipro, TVS, Chidambaram and Murugappa groups have
grown tremendously mostly due to insider domination and poor investor protection in the country.
As a consequence of this fertile situation, the large firms obtain not only the finance they need but
also political clout that comes with the access to such finance in a corruption-ridden society, as well
as the security from competition of smaller firms that require external capital. Thus poor corporate
governance provides large family-owned firms not only secure finance but also easy access to
politics and markets. The dominant families have thus abiding interest in keeping the status quo lest
the reforms take away their privileges and confer protection to outside investors.