Limits to Independent Director-Driven Monitoring Under Concentrated Shareholding : Evidence from India

In India, ownership of most listed firms is concentrated in the hands of a group or family of promoters. Indian regulators have adopted the Anglo-American governance recipe of firm monitoring through Independent Directors (IDs) to ensure the protection of minority interest. The efficacy of this adoption is questioned in prior literature, specifically in ‘controlled firms’ where the IDs are faced with promoters holding majority voting rights. The change in efficacy of monitoring by an ID across ‘controlled firms’ and widely held firms has not been dealt with in prior literature. In this study we analyze the efficacy of IDs across ownership patterns (controlled vis a vis widely held firms) in protecting minority interest following two approaches. First, we follow a game theoretic framework to illustrate how promoters can use their power over appointment and appraisal of IDs and control over information to reduce the effectiveness of scrutiny by IDs. We find that, in equilibrium, Promoters can induce IDs to behave quid pro quo, or to limit themselves to not go beyond the bare minimum for minority interest protection. Second, we empirically investigate the effectiveness of IDs in protecting minority interest in widely held vis-à-vis ‘controlled firms.’ We find that IDs protect minority interest in firms with widely held ownership but can work against minority interest in controlled firms. We advocate greater powers to minority shareholders in appointing IDs to ensure that “nemo judex in causa sua”