BATCH 2019-24

PROJECT
Topic

“Critical Analysis of role of Corporate

Governance in influencing Corporate
Finance activities in Indian Economy”
Corporate Finance

Submitted to: Submitted by:

Ms. Aishwariya, Gaury Singh
ASSISTANT PROFESSOR (CF) B. A. LLB Hons.,
FACULTY OF LAW, ROLL NO- 91901040009
MARWADI UNIVERSITY

1
 DECLARATION BY THE STUDENT

I, GAURY SINGH, certify that the work embodied in this project work, entitled
“Critical Analysis of role of Corporate Governance in influencing Corporate
Finance activities in Indian Economy”, is my own bon-a-fide work carried out
by me under the supervision of Ms. Aishwariya Faculty of Law, Marwadi
University. The matter embodied in this Project has not been submitted for the
award of any other degree/diploma.
I declare that I have faithfully acknowledged, given credit to and referred to the
authors/ research workers wherever their works have been cited in the text and
the body of the project. I further certify that I have not wilfully lifted up some
other's work, Para, text, data, results, figures etc. reported in the journals, books,
magazines, reports, dissertations, theses, etc., or available at web-sites and
included them in this project work and cited as my own work.

Place: Marwadi University

2
 SUPERVISOR’S CERTIFICATE

This is to certify that the work embodied in the accompanying p roject entitled
“Critical Analysis of role of Corporate Governance in influencing Corporate
Finance activities in Indian Economy” has been carried out entirely by the
candidate GAURY SINGH under my direct supervision and guidance and that
the candidate has fulfilled the requirements of the regulations laid down for the
partial fulfilment of B. A. LLB Hons. degree examination in the course Corporate
Finance (Semester VIII), Faculty of Law, Marwadi University.

Ms. Aishwariya
Assistant Professor (CF),
Faculty of Law,
Marwadi University

3
 ACKNOWLEDGEMENT

The success and final outcome of this project required a lot of guidance and
assistance from the supervisor and I am extremely privileged to have got this all
along the completion of my project. All that I have done is only due to such
supervision and assistance of Ms. Aishwariya. I am thankful to and fortunate
enough to get constant encouragement, support and guidance from him.

Date:
Place: Marwadi University

4
 TABLE OF CONTENTS

Serial no. Particulars Page no.

1 Introduction 06

2 Relationship between Corporate 11

Governance and Corporate Finance
and its impact on business activities

3 Critical Analysis of Impact of 15

Corporate Governance on Corporate
Finance

4 Conclusion 18

5 References 20

5
 Chapter 1
Introduction

Corporate governance refers to the set of practices, policies, and regulations that guide the
actions and decisions of corporate entities. The objective of corporate governance is to promote
accountability, transparency, and fairness in the management of corporate activities. In recent
years, the role of corporate governance in influencing corporate financial activities has become
increasingly important, particularly in emerging economies like India.

India has witnessed significant changes in its corporate governance practices over the years.
These changes have been driven by a range of factors, including regulatory reforms, changes
in business practices, and heightened public awareness of corporate misconduct. In particular,
the enactment of the Companies Act, 2013 and the Securities and Exchange Board of India
(SEBI) regulations have led to significant improvements in corporate governance practices in
India.

The role of corporate governance in influencing corporate financial activities in the Indian
economy is critical. Effective corporate governance practices can help to ensure that companies
are managed in a responsible and sustainable manner, which can enhance investor confidence,
attract investment, and promote economic growth. In particular, corporate governance can play
a critical role in ensuring that companies adopt sound financial practices, including risk
management, financial reporting, and compliance with regulatory requirements.

However, the effectiveness of corporate governance in influencing corporate financial

activities in the Indian economy depends on a range of factors, including the regulatory
environment, the quality of corporate governance practices, and the willingness of companies
to adopt best practices. While significant progress has been made in improving corporate
governance practices in India, there is still room for improvement, particularly in areas such as
board composition, independent audits, and shareholder rights.

Corporate governance and corporate finance are two essential pillars of the modern corporate
world. Corporate governance can be defined as the set of rules, regulations, and principles that
govern the behavior of companies and their stakeholders. On the other hand, corporate finance
deals with the financial activities of a company, such as capital budgeting, financing, and
investment decisions. The relationship between corporate governance and corporate finance is

6
crucial as good corporate governance can positively influence a company's financial decisions
and outcomes. The purpose of this essay is to critically analyse the role of corporate governance
in influencing corporate finance activities in the Indian economy.

India is one of the fastest-growing economies in the world, and its corporate sector plays a
significant role in the country's economic growth and development. The Indian corporate sector
has witnessed significant growth and transformation over the past few decades, and corporate
governance has emerged as a critical factor in ensuring the sustainability and growth of
companies. Corporate governance in India has evolved over the years, and several reforms and
regulations have been introduced to improve the transparency, accountability, and efficiency
of companies.

The role of corporate governance in influencing corporate finance activities in the Indian
economy can be analysed from various perspectives, including the regulatory framework,
ownership structure, board composition, and stakeholder engagement. In the following
sections, we will critically analyse each of these factors and their impact on corporate finance
activities in India.

Regulatory Framework

The regulatory framework is a critical component of corporate governance in India, and it plays
a significant role in shaping the financial activities of companies. The Securities and Exchange
Board of India (SEBI) is the primary regulatory body that oversees the securities market and
regulates listed companies' activities. SEBI has introduced several regulations and guidelines
to improve the transparency, accountability, and efficiency of listed companies in India.

One of the significant regulatory reforms introduced by SEBI is the mandatory requirement for
companies to appoint independent directors on their board. Independent directors are expected
to provide an objective perspective on the company's affairs, monitor the management's
performance, and safeguard the interests of minority shareholders. The appointment of
independent directors has helped improve the governance structure of companies and has had
a positive impact on their financial performance.

Another significant regulatory reform introduced by SEBI is the requirement for companies to
comply with the Clause 49 of the Listing Agreement. Clause 49 mandates companies to have
a certain number of independent directors on their board, establish an audit committee, and
disclose their financial statements and related-party transactions. Compliance with Clause 49

7
has helped improve the transparency and accountability of companies and has contributed to
the development of a robust corporate governance framework in India.

In conclusion, the role of corporate governance in influencing corporate financial activities in

the Indian economy is critical. Effective corporate governance practices can help to promote
transparency, accountability, and sustainability in the management of corporate activities,
which can contribute to economic growth and development. However, to realize the full
potential of corporate governance in the Indian economy, ongoing efforts are needed to
strengthen the regulatory framework, improve corporate governance practices, and promote
greater transparency and accountability in corporate activities.

1.1. Review of literature

• Several scholars have investigated the role of corporate governance in influencing
corporate financial activities in the Indian economy. Agarwal and Singh (2018)
analysed the impact of corporate governance on the financial performance of Indian
firms. They found that firms with good corporate governance practices exhibited better
financial performance compared to firms with poor corporate governance practices.
• Similarly, Goyal and Singh (2018) examined the impact of corporate governance on
the financial reporting quality of Indian firms. They found that firms with better
corporate governance practices had higher financial reporting quality, which led to
better access to capital markets and higher valuation of the firm.
• Another study by Bawa and Sharma (2018) examined the impact of corporate
governance on the risk management practices of Indian firms. They found that firms
with better corporate governance practices had more effective risk management
practices, which helped them to mitigate financial risks and improve their financial
performance.
• In contrast, other scholars have criticized the effectiveness of corporate governance
practices in the Indian context. For instance, Jain and Singh (2018) argued that despite
the implementation of corporate governance regulations in India, there are still
significant gaps in corporate governance practices. They highlighted the need for
greater transparency, accountability, and independent oversight in corporate activities.
• Similarly, Joshi and Pathak (2018) argued that the Indian corporate governance
framework is characterized by weak enforcement and a lack of institutional
mechanisms for effective implementation. They suggested that there is a need to

8
 strengthen the regulatory framework and promote greater accountability in corporate
activities
1.2. Statement of problem

The statement of the problem in the critical analysis of the role of corporate governance in
influencing corporate financial activities in the Indian economy is the effectiveness of
corporate governance practices in India. Despite the enactment of the Companies Act, 2013
and the Securities and Exchange Board of India (SEBI) regulations, there are still significant
gaps in corporate governance practices in India. The problem is whether the existing corporate
governance practices are effective in promoting transparency, accountability, and sustainability
in the management of corporate activities and whether they have been successful in ensuring
that companies adopt sound financial practices, including risk management, financial
reporting, and compliance with regulatory requirements. The effectiveness of corporate
governance practices in India is critical for promoting investor confidence, attracting
investment, and promoting economic growth. Therefore, the problem is to investigate the
effectiveness of corporate governance practices in India and identify areas that need
improvement.

1.3. Objectives
• To examine the regulatory framework for corporate governance in India and assess its
effectiveness in promoting transparency, accountability, and sustainability in the
management of corporate activities.
• To analyse the impact of corporate governance on the financial performance, financial
reporting quality, and risk management practices of Indian firms.
• To identify the gaps in corporate governance practices in India and assess the extent to
which companies are adopting best practices.
• To evaluate the effectiveness of existing mechanisms for monitoring and enforcing
corporate governance practices in India.
• To recommend strategies for improving corporate governance practices in India,
including strengthening the regulatory framework, promoting greater transparency and
accountability, and enhancing the role of independent oversight.

9
1.4. Hypothesis

Following hypothesis has been used to prepare a study on the mentioned research project
topic:

• Hypothesis: Effective corporate governance practices positively influence corporate

financial activities in the Indian economy by promoting transparency, accountability,
and sustainability in the management of corporate activities, thereby improving
financial performance, financial reporting quality, and risk management practices of
firms.
1.5. Research methodology

The method adopted here is “Doctrinal method” of acquiring information. Doctrinal method
allows the researcher to carry out a detailed historical research (history of law, for e.g.),
whereby the information has been gathered with the use of secondary sources with established
facts and figures, thus aiding in acquiring a better conceptual clarity.

10
 Chapter 2

Relationship between Corporate Governance and Corporate Finance and

its impact on business activities

The relationship between corporate governance and corporate finance has become increasingly
important in recent years, as both disciplines are essential for the proper functioning of modern
corporations. Corporate governance refers to the set of rules, policies, and practices that guide
the behavior of companies and their stakeholders, while corporate finance deals with the
financial activities of a company, such as capital budgeting, financing, and investment
decisions. The purpose of this essay is to explore the relationship between corporate
governance and corporate finance and its impact on business activities.

The Relationship Between Corporate Governance and Corporate Finance

Corporate governance and corporate finance are interdependent, as good corporate governance
can positively influence a company's financial decisions and outcomes. The following sections
will discuss the various aspects of this relationship.

1. Board Composition and Financial Decisions

The composition of the board of directors plays a crucial role in overseeing the management
of the company and making critical financial decisions. A well-structured and diverse board
can bring different perspectives and expertise to the table, leading to better decision-making.
The board of directors also plays a crucial role in monitoring the management's performance
and ensuring that the company is run in the best interests of all stakeholders.

2. Ownership Structure and Financial Decisions

The ownership structure of companies is another critical factor that influences corporate
finance activities. Companies can have either a concentrated or dispersed ownership structure.
Concentrated ownership refers to a situation where a few large shareholders hold a significant
stake in the company, while dispersed ownership refers to a situation where the ownership is
spread out among a large number of shareholders.

Concentrated ownership can lead to better alignment of interests between the shareholders and
the management, leading to a more efficient allocation of resources. Large shareholders can

11
also play an active role in monitoring the management's performance and ensuring that the
company is run in the best interests of all stakeholders. However, concentrated ownership can
also lead to a concentration of power in the hands of a few shareholders, leading to conflicts of
interest and agency problems.

3. Regulatory Framework and Financial Decisions

The regulatory framework is a critical component of corporate governance, and it plays a

significant role in shaping the financial activities of companies. The regulatory framework
provides the rules, regulations, and guidelines that companies must follow to ensure
transparency, accountability, and efficiency.

Regulatory reforms have been introduced to improve the transparency, accountability, and
efficiency of companies. One of the significant regulatory reforms introduced is the
requirement for companies to appoint independent directors on their board. Independent
directors are expected to provide an objective perspective on the company's affairs, monitor
the management's performance, and safeguard the interests of minority shareholders.

4. Stakeholder Engagement and Financial Decisions

Stakeholder engagement is another essential aspect of corporate governance, as it involves the

active participation of all stakeholders in the company's decision-making process. The
stakeholders include shareholders, employees, customers, suppliers, and the community.

Stakeholder engagement can positively influence a company's financial decisions and

outcomes. When stakeholders are actively involved in the decision-making process, they are
more likely to support the decisions made by the company. This support can lead to increased
confidence in the company, which can positively impact its financial performance.

Impact of the Relationship Between Corporate Governance and Corporate Finance on Business
Activities

The relationship between corporate governance and corporate finance can have a significant
impact on business activities. The following sections will discuss the various impacts of this
relationship.

1. Better Financial Performance

Good corporate governance can positively influence a company's financial performance. When
companies have a robust governance framework, they are more likely to make better financial

12
decisions, allocate resources efficiently, and create value for all stakeholders. Companies with good
governance practices are more likely to make better financial decisions, allocate resources
efficiently, and create value for all stakeholders. Good governance practices can also help
companies manage risk and reduce the likelihood of financial scandals and fraud.

In contrast, poor governance practices can lead to financial instability, fraud, and other
unethical behavior. This can negatively impact a company's financial performance, reputation,
and credibility, and ultimately affect its ability to attract and retain customers, investors, and
employees.

2. Improved Access to Capital

Companies with good governance practices are more likely to attract capital from investors.
Investors are more likely to invest in companies that have a robust governance framework, as
they are more confident that their investments will be safe and profitable. Good governance
practices can also lead to better credit ratings, which can improve a company's ability to access
debt financing.

In contrast, companies with poor governance practices may struggle to attract capital from
investors, as they are perceived as risky and unreliable. This can make it challenging for these
companies to fund their operations, invest in growth, and meet their financial obligations.

3. Enhanced Stakeholder Engagement

Corporate governance practices can also impact stakeholder engagement. When companies
have a robust governance framework, they are more likely to engage with stakeholders, listen
to their concerns, and address their needs. This can lead to improved relationships with
customers, employees, suppliers, and other stakeholders.

In contrast, companies with poor governance practices may struggle to engage with
stakeholders, as they are perceived as untrustworthy and unresponsive. This can lead to
negative publicity, boycotts, and other forms of stakeholder activism, which can negatively
impact a company's reputation and financial performance.

4. Efficient Resource Allocation

Efficient resource allocation is critical to the success of any business. Companies with good
governance practices are more likely to allocate resources efficiently, as they have a clear
understanding of their objectives and priorities. Good governance practices can also help

13
 companies identify and manage risks, which can reduce the likelihood of financial losses and
other negative impacts.

In contrast, companies with poor governance practices may struggle to allocate resources
efficiently, as they may lack clear objectives and priorities. This can lead to wasteful spending,
inefficient operations, and other financial inefficiencies.

5. Increased Transparency and Accountability

Transparency and accountability are essential elements of good corporate governance. When
companies are transparent and accountable, they are more likely to earn the trust of
stakeholders and maintain a positive rapport among the management. In contrast, in case of
lack of accountability on the part of the company, it creates an environment of mistrust,
discomfort and disharmony among stakeholders and creates a deep turmoil among the
stakeholders.

Even the Supreme Court of India does not shy away from highlighting the influence and
impact that corporate governance policy has on corporate finance activities in India:
1. Securities and Exchange Board of India (SEBI) v. Sahara India Real Estate Corp. Ltd. &
Ors. (2012)1 – In this case, the Supreme Court of India held that adherence to corporate
governance principles and transparency in financial reporting are essential for investor
protection and market integrity.
2. Satyam Computer Services Ltd. v. SEBI (2013)2 – In this case, the Securities Appellate
Tribunal (SAT) held that the implementation of strong corporate governance policies
and practices can help prevent fraud and mismanagement in a company's financial
activities. The SAT also emphasized the importance of effective board oversight and
transparency in financial reporting.
3. In Re: United Bank of India (2017)3 – In this case, the Calcutta High Court held that
banks must adhere to sound corporate governance practices to ensure the safety and
soundness of the banking system. The court emphasized the importance of effective risk
management and compliance with regulatory requirements in maintaining the stability of
the financial sector.

1 C.A. No. 9813 of 2011

2 Writ Petition No.37487 of 2012
3 W.P. No. 21814 (W) of 2017

14
 Chapter 3

Critical Analysis of Impact of Corporate Governance on Corporate

Finance

Before critically evaluating the impact that corporate governance has on corporate finance, let
us look at the positive impact of corporate governance policies on company’s financial
activities:

• Improved Investor Confidence: Good corporate governance practices can improve

investor confidence in a company, leading to increased investment and access to capital
markets. Investors are more likely to invest in companies that are transparent,
accountable, and have a strong commitment to ethical practices.
• Reduced Risk: Corporate governance practices help companies to identify and mitigate
risks, resulting in better risk management and reduced losses. This leads to improved
financial performance and profitability in the long run.
• Better Decision-Making: Corporate governance practices ensure that decision-making
processes are efficient, effective, and transparent, resulting in better financial decisions.
This includes investments in research and development, mergers and acquisitions, and
capital expenditures.
• Improved Stakeholder Relations: Good corporate governance practices ensure that all
stakeholders, including shareholders, employees, customers, suppliers, and the
community, are treated fairly and transparently. This leads to improved stakeholder
relations and increased trust in the company.

While it is generally agreed that good corporate governance positively impacts a company's
financial decisions and outcomes, there are some who may argue that the impact of corporate
governance on corporate finance is not always positive. Now, let us explore some of the
potential negative impacts of corporate governance on corporate finance:

Higher Compliance Costs

Implementing good corporate governance practices often involves additional compliance costs,
such as hiring independent directors, conducting regular audits, and reporting to regulatory
authorities. These costs can put a strain on a company's finances, especially for small and
medium-sized enterprises (SMEs) with limited resources. In some cases, the costs of

15
compliance can outweigh the benefits, leading to reduced investment in corporate finance
activities.

Reduction in Risk-Taking

Good corporate governance practices often aim to minimize risks and prevent potential losses.
While this is beneficial in terms of protecting the interests of stakeholders, it may lead to a
reduction in risk-taking activities, such as innovation, expansion, and investment in emerging
markets. This reduction in risk-taking can negatively impact a company's financial
performance in the long run, as it may lead to missed opportunities for growth and profitability.

Conflict of Interest

One of the potential negative impacts of corporate governance is the potential for conflict of
interest between shareholders and management. Shareholders may have different interests and
goals than management, and the board of directors may struggle to balance these conflicting
interests. This can lead to delays in decision-making, reduced innovation, and increased
operational costs, negatively impacting corporate finance activities.

Inefficient Decision-Making

While good corporate governance aims to improve decision-making processes, it may also lead
to inefficiencies in decision-making. This is especially true when the decision-making process
is overly complex, bureaucratic, or time-consuming. Inefficient decision-making can delay the
implementation of important financial decisions, such as investments in new products,
expansion into new markets, and acquisitions.

Limited Flexibility

Corporate governance practices, such as reporting requirements, transparency, and

accountability, can limit a company's flexibility in terms of making quick decisions and
responding to market changes. In a fast-paced and dynamic business environment, companies
need to be able to respond quickly to changes in the market and take advantage of emerging
opportunities. Limitations in flexibility can reduce a company's ability to adapt to changing
market conditions and negatively impact its financial performance.

Thus, while the impact of corporate governance on corporate finance is generally considered
to be positive, there are potential negative impacts that should be taken into account. It is
essential for companies to implement good corporate governance practices in a way that

16
balances the interests of all stakeholders, including shareholders, management, and employees.
Companies must also be mindful of the potential costs and limitations of corporate governance
and ensure that they do not hinder their ability to make strategic financial decisions and
investments.

17
 Chapter 4

Suggestion & Conclusion

On the positive side, good corporate governance practices can positively impact a company's
financial decisions and outcomes. For example, a well-structured and diverse board of directors
can bring different perspectives and expertise to the table, leading to better decision-making.
The board of directors also plays a crucial role in monitoring the management's performance
and ensuring that the company is run in the best interests of all stakeholders. Good corporate
governance can also promote transparency, accountability, and risk management, leading to
improved financial performance and reduced costs of capital.

Corporate finance also plays a crucial role in supporting good corporate governance practices.
For example, adequate financing can enable a company to invest in corporate governance
measures, such as hiring independent directors, conducting regular audits, and reporting to
regulatory authorities. Corporate finance can also help companies achieve their long-term
goals, such as innovation, expansion, and investment in emerging markets, while balancing the
interests of stakeholders.

It becomes likely to be suggested that however, the relationship between corporate

governance and corporate finance is not always positive. There are potential negative impacts
of corporate governance, such as higher compliance costs, reduced risk-taking, conflict of
interest, inefficient decision-making, and limited flexibility. Companies must implement
good corporate governance practices in a way that balances the interests of all stakeholders,
including shareholders, management, and employees. Companies must also be mindful of the
potential costs and limitations of corporate governance and ensure that they do not hinder their
ability to make strategic financial decisionsand investments.

It is also worth noting that the relationship between corporate governance and corporate finance
can be influenced by external factors, such as regulatory frameworks, market conditions, and

18
stakeholder expectations. For example, regulatory frameworks can impose additional
compliance costs and reporting requirements, leading to increased pressure on companies to
adopt good corporate governance practices. Market conditions, such as economic downturns
and industry disruptions, can also impact a company's financial decisions and outcomes,
highlighting the importance of having robust corporate governance practices in place.

In conclusion, the relationship between corporate governance and corporate finance is a critical
aspect of modern business practices. Good corporate governance practices can positively
impact a company's financial decisions and outcomes, while corporate finance can support
good corporate governance practices and enable companies to achieve their long-term goals.
However, companies must also be mindful of the potential negative impacts of corporate
governance and ensure that they implement good corporate governance practices in a way that
balances the interests of all stakeholders. Ultimately, companies that adopt and implement
robust corporate governance practices are more likely to achieve sustainable financial
performance and long-term success.

19
References

Articles

• Agarwal, S., & Singh, S. (2018). Corporate governance and financial performance: A
study of Indian firms. Journal of Management & Governance, 22(4), 885-910.
• Bawa, S., & Sharma, G. D. (2018). Corporate governance and risk management
practices: A study of Indian firms. Global Business Review, 19(1), 20-34.
• Goyal, M., & Singh, H. (2018). Corporate governance and financial reporting quality:
An empirical analysis of Indian firms. Global Business Review, 19(3_suppl), S80-S96.
• Jain, P., & Singh, H. (2018). Corporate governance in India: A critical appraisal.
Journal of Management & Governance, 22(2), 427-458.
• Joshi, N., & Pathak, R. (2018). Corporate governance in India: The road ahead. South
Asian Journal of Management, 25(3), 65-81.
• Khanna, T., & Palepu, K. (2010). Winning in emerging markets: A roadmap for strategy
and execution. Harvard Business Press.
• Raghunandan, A., & Rama, D. V. (2014). Corporate governance in India: Progress and
challenges. International Journal of Disclosure and Governance, 11(3), 233-247.
• Sharma, S., & Bhagat, R. S. (2017). Corporate governance in India: Challenges and
opportunities. International Journal of Business Governance and Ethics, 12(1), 1-14.
• Subramanian, K. N. (2017). Corporate governance in India: An assessment. Journal of
Business and Management, 19(2), 24-30.
• Tandon, R. (2016). Corporate governance in India: An overview. International Journal
of Law and Management, 58(3), 228-238.
Books
• Singh, K. (2017). Corporate Governance in India: Change and Continuity. Routledge.
• Vij, M., & Singh, G. (Eds.). (2018). Corporate Governance and Financial Management:
Computational Optimization Modelling and Accounting Perspectives. Springer.
• Singh, P. K. (2015). Corporate Governance and Financial Performance in India: A
Comparative Study of Selected Indian Companies. LAP Lambert Academic Publishing.
• Gup, B. E. (Ed.). (2012). Corporate Governance in Banking: A Global Perspective.
Edward Elgar Publishing.

20
Dynamic Links
• https://www.questia.com/library/journal/1P3-3066347021/the-impact-of-corporate-
governance-on-the-financial
• https://journals.sagepub.com/doi/abs/10.1177/097317411101000303
• https://www.ccsenet.org/journal/index.php/ijbm/article/view/20153

• https://www.researchgate.net/publication/323857387_Corporate_Governance_and_Fina
ncial_Performance_A_Study_of_Indian_Companies

21