Governance concerns remain in Indian family firms, says Moody's
Tuesday, 23 October 2007
BANGALORE, Oct 22 (AFP): Family-run companies that dominate Indian business have been quick to tap emerging market opportunities, but concerns remain over governance standards, Moody's said today.
Seventeen of the 30 companies on the Mumbai stock exchange's main Sensex index are family-controlled, signalling their powerful hold on the economy, the US-based credit assessor said in a study it conducted with its Indian unit.
Moody's and local firm ICRA examined governance in 32 companies in 16 prominent family-controlled Indian businesses including conglomerates run by the Tata and Birla groups.
"Moody's has observed globally that family-controlled companies can face specific corporate governance challenges," it said, listing fewer checks and balances besides leadership transition risks and conflicting market strategies.
The report said Indian family companies had responded well to the opportunities available in the fast-growing and liberalising economy, which is expanding at an annual pace of nine percent.
"Although Indian corporate governance practices are improving, this largely reflects regulation of listed companies, particularly regarding checks and balances such as composition of the board of directors and the operations of audit committees," said Chetan Modi, Moody's India director.
"Governance issues persist in areas not covered by regulation," added Modi.
He cited indications that "succession planning is not fully deliberated with independent directors."
"There is often insufficient transparency on ownership and control, related-party transactions and the group's overall financial position," Modi said.
The report also noted that despite regulations regarding independent board members, families retain significant control of listed companies, making it difficult to ascertain the "true independence" of directors.
Many family-run Indian companies date back to the late 1800s and benefited from special treatment and subsidies that made them near monopolies after British rule ended in 1947, helped by strict controls barring competition.
That changed in 1991 when India opened up the economy and lifted four decades of socialist-style rules shackling private enterprise and foreign investment, but family firms remain a force to reckon in businesses ranging from oil and steel to autos and telecoms.
Seventeen of the 30 companies on the Mumbai stock exchange's main Sensex index are family-controlled, signalling their powerful hold on the economy, the US-based credit assessor said in a study it conducted with its Indian unit.
Moody's and local firm ICRA examined governance in 32 companies in 16 prominent family-controlled Indian businesses including conglomerates run by the Tata and Birla groups.
"Moody's has observed globally that family-controlled companies can face specific corporate governance challenges," it said, listing fewer checks and balances besides leadership transition risks and conflicting market strategies.
The report said Indian family companies had responded well to the opportunities available in the fast-growing and liberalising economy, which is expanding at an annual pace of nine percent.
"Although Indian corporate governance practices are improving, this largely reflects regulation of listed companies, particularly regarding checks and balances such as composition of the board of directors and the operations of audit committees," said Chetan Modi, Moody's India director.
"Governance issues persist in areas not covered by regulation," added Modi.
He cited indications that "succession planning is not fully deliberated with independent directors."
"There is often insufficient transparency on ownership and control, related-party transactions and the group's overall financial position," Modi said.
The report also noted that despite regulations regarding independent board members, families retain significant control of listed companies, making it difficult to ascertain the "true independence" of directors.
Many family-run Indian companies date back to the late 1800s and benefited from special treatment and subsidies that made them near monopolies after British rule ended in 1947, helped by strict controls barring competition.
That changed in 1991 when India opened up the economy and lifted four decades of socialist-style rules shackling private enterprise and foreign investment, but family firms remain a force to reckon in businesses ranging from oil and steel to autos and telecoms.