DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW

2017-2018

CORPORATE LAW

FINAL DRAFT

ON

CORPORATE OWNERSHIP STRUCTURES IN INDIA- A STUDY

SUBMITTED TO: - SUBMITTED BY:-

MS. PRIYA ANURAGINI SHAILESH KUMAR
ASSISTANCE PROFESSOR OF LAW B.A LL.B (HONS.), SEM- VI
ENROLL.-150101120
ACKNOWLEDGEMENT
I wish to extend my sincere gratitude to my teacher of ‘Corporate Law’, Ms. Priya Anuragini,
who by suggesting the topic, ‘Corporate Ownership Structures in India’ for the project, have
helped me garner more knowledge and broaden my insight on the same. This project would not
have been possible without her constant guidance and infallible support.

Moreover, I would like to express my heartfelt gratitude to the library staff, which was always on
their toes to cater to my needs whenever required.

Also, I will also be indebted to my seniors who extended their helping hand and imparted
valuable suggestions throughout the process of making the project.

THANK YOU
Table of Contents
ACKNOWLEDGEMENT ............................................................................................................................ 2
OBJECTIVE ............................................................................................................................................. 4
RESEARCH QUESTIONS................................................................................................................... 4
INTRODUCTION ........................................................................................................................................ 5
OWNERSHIP TREND AROUND THE WORLD .................................................................................................. 5
CONCENTRATED OWNERSHIP .............................................................................................................. 6
SOLE PROPRIETORSHIPS .................................................................................................................... 6
PARTNERSHIPS ..................................................................................................................................... 7
LIMITED PARTNERSHIPS .................................................................................................................... 7
CORPORATIONS AND LLCS ........................................................................................................................ 8
NONPROFIT CORPORATIONS............................................................................................................. 8
COOPERATIVES..................................................................................................................................... 9
OWNERSHIP STRUCTURE AND FIRM PERFORMANCE .................................................................................. 9
CONCLUSION ........................................................................................................................................... 10
BIBLIOGRAPHY ....................................................................................................................................... 11
OBJECTIVE
The project delineates into the concept of the ‘company’ besides its existence with its members
and other associated persons. This paper argues that the structure of corporate ownership varies
systematically in ways that are consistent with value maximization. Since, the opening of LPG
band wagon private players has played a significant role in the development of the economy. The
present government with many of its progressive campaigns such as Make in India or Skill India
which shows the importance of Corporates. Ease of Business doing Index indicates nation’s
status in corporate presence. The giant leap in Ease of Business doing Index indicates nation’s
preference to corporate’s role in India. Therefore, it is of immense & utmost importance to
understand the nature & types of Corporate Ownership.

RESEARCH QUESTIONS
The project, primarily, aims at answering the aforementioned hypothesis in affirmative. The
research questionnaire that the project would try to answer area as follows:

1. To find out the Ownership pattern in India.

2. To find out the relation between the corporate ownership structure and the firm
performance in Indian corporate market
INTRODUCTION
Ownership structures are of major importance in corporate governance because they affect the
incentives of managers and thereby the efficiency of the firm. The ownership structure is defined
by the distribution of equity with regard to votes and capital but also by the identity of the equity
owners. Ownership structure can be distinguished by the level of concentration of ownership
rights as well as by the identity of the owner. In general ownership structure may include inside
as well as outside owners. Inside owners are managers and employees, and outside owners are
individuals, organizations and state. There is clear evidence that the structure of company
ownership can significantly influence the financial performance of the company through, for
example, its impact on incentive mechanism, decision-making procedures as well as
performance-monitoring system. However the theoretical and empirical evidence on the effect of
ownership structure on company’s efficiency is very controversial. To see this controversy
further I summarize the theoretical evidence on the effects of different ownership structures in
terms of types of owners and the level of ownership concentration on the corporate performance.

OWNERSHIP TREND AROUND THE WORLD

Various academic researches on corporate ownership was generally dominated by studies
focused on the United States and the United Kingdom which have predominantly dispersed
ownership structures 1 . In which shareholders (the principal) provide funds to managers (the
agent) to put them to productive use and generate returns for the principal2. Although Japan in
this study returned dispersed ownership because of direct ownership not being higher than 20% (
the study cut-off criterion), in effect the country qualified as concentrated ownership geography
because of predominant inter-corporate holdings.

1
R V Anand, Ownership Trends in Corporate India 2001 – 2011 Evidence and Implications, Indian Institute of
Management Banglore, https://iimb.ac.in/research/sites/default/files/WP%20No.%20419_0.pdf.
2
JayatiSarkar, Ownership and Corporate Governance in Indian Firms,
https://www.nseindia.com/research/content/CG_9.pdf.
CONCENTRATED OWNERSHIP
Corporate ownership in India is predominantly concentrated in the hands of domestic individuals
and promoter groups, multinational parents, or the state. Much of the family and other domestic
holdings could be traced back to the days of the British Managing Agencies (Balasubramanian
2010, pp. 359-365), arguably unique to India that enabled essentially British merchants and some
Indian businessmen to spawn and nurture different enterprises which eventually grew into giant
corporations in their own right. Concentrated ownership also has its costs, which are basically
represented by possibility of expropriation by large investors of other investors and stakeholders
of the firm. Another cost of concentrated ownership is that large owners bear an excessive risk
from decreased diversification. Some recent studies point out that high concentration of
ownership may lead to excessive monitoring of managers.

OTHER TYPES OF CORPORATE OWNERSHIP STRUCTURE

The most common ownership:

 Sole Proprietorship Partnership

 Limited partnership
 Limited Liability Company (LLC)
 Corporation (for-profit)
 Nonprofit Corporation (not-for-profit)
 Cooperative.

SOLE PROPRIETORSHIPS

A sole proprietorship is a one-person business that is not registered with the state like a limited
liability company (LLC) or corporation. You don't have to do anything special or file any papers
to set up a sole proprietorship -- you create one just by going into business for yourself. Legally,
a sole proprietorship is inseparable from its owner -- the business and the owner are one and the
same. This means the owner of the business reports business income and losses on his or her
personal tax return and is personally liable for any business-related obligations, such as debts or
court judgments.

The key features

 Ownership by a one single individual who has a legal title to the assets and properties of
the business.
 The entire profit goes to the sole proprietor. Similarly, he also bears the entire risk or
losses of the firm.
 The owner of the business is the sole manager of the business.
 The entire capital of the business is provided by the owner. He may raise more funds
from outside through borrowings
 The proprietor and the business enterprise are one and the same in the eyes of the law. •
The liability of proprietor is unlimited.
 There are less legal formalities.

PARTNERSHIPS
Similarly, a partnership is simply a business owned by two or more people that haven’t filed
papers to become a corporation or a limited liability company (LLC). You don't have to file any
paperwork to form a partnership -- the arrangement begins as soon as you start a business with
another person. As in a sole proprietorship, the partnership's owners pay taxes on their shares of
the business income on their personal tax returns and they are each personally liable for the
entire amount of any business debts and claims. Sole proprietorships and partnerships make
sense in a business where personal liability isn't a big worry -- for example, a small service
business in which you are unlikely to be sued and for which you won't be borrowing much
money for inventory or other costs.

LIMITED PARTNERSHIPS
Limited partnerships are costly and complicated to set up and run, and are not recommended for
the average small business owner. Limited partnerships are usually created by one person or
company (the "general partner"), who will solicit investments from others (the "limited
partners"). The general partner controls the limited partnership's day-to-day operations and is
personally liable for business debts (unless the general partner is a corporation or an LLC).
Limited partners have minimal control over daily business decisions or operations and, in return,
they are not personally liable for business debts or claims. Consult a limited partnership expert if
you're interested in creating this type of business.

CORPORATIONS AND LLCS

Forming and operating an LLC or a corporation is a bit more complicated and costly, but well
worth the trouble for some small businesses. The main benefit of an LLC or a corporation is that
these structures limit the owners' personal liability for business debts and court judgments
against the business. What sets the corporation apart from all other types of businesses is that a
corporation is an independent legal and tax entity, separate from the people who own, control
and manage it. Because of this separate status, the owners of a corporation don't use their
personal tax returns to pay tax on corporate profits -- the corporation itself pays these taxes.
Owners pay personal income tax only on money they draw from the corporation in the form of
salaries, bonuses, and the like. Like corporations, LLCs provide limited personal liability for
business debts and claims. But when it comes to taxes, LLCs are more like partnerships: the
owners of an LLC pay taxes on their shares of the business income on their personal tax returns.
Corporations and LLCs make sense for business owners who either 1) run a risk of being sued by
customers or of piling up a lot of business debts, or 2) have substantial personal assets they want
to protect from business creditors.

NONPROFIT CORPORATIONS
A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious,
literary, or scientific purpose. A nonprofit can raise much-needed funds by soliciting public and
private grant money and donations from individuals and companies. The federal and state
governments do not generally tax nonprofit corporations on money they take in that is related to
their nonprofit purpose, because of the benefits they contribute to society.
COOPERATIVES
Some people dream of forming a business of true equals -- an organization owned and operated
democratically by its members. These grassroots business organizers often refer to their
businesses as a "group," "collective," or "co-op" -- but these are often informal rather than legal
labels. For example, a consumer co-op could be formed to run a food store, a bookstore, or any
other retail business. Or a workers' co-op could be created to manufacture and sell arts and crafts.
Most states do have specific laws dealing with the set-up of cooperatives, and in some states you
can file paperwork with the secretary of state's office to have your cooperative formally
recognized by the state. Check with your secretary of state's office for more information.

OWNERSHIP STRUCTURE AND FIRM PERFORMANCE

Proportion of shares held by different parties in the equity capital of the company is actually

what is being referred to when speaking about ownership structure. the principle group of

shareholders in companies in the Indian context are promoters, institutional investors, private

corporate bodies, Indian public, non-resident Indian (NRI), other corporate bodies and ‘any

other’ group. All these category of shareholders has different economic motivation, way of

nurturing their investment and participating in strategic decision making. Different consequent

power in respect to decision making is held by different shareholders and this may affect the

performance of an organization in due course, hence ownership structure appears to be a factor

critically affecting the corporate performance. Equity ownership by the manager may increase

the corporate performance because it means better alignment of the monetary incentives between

the manager and the equity owners3

3
Jensen, M., & W. Meckling., “Theory of the firm: Managerial behavior, agency costs and ownership structure”.
Journal of Financial Economics, 3, 1976, at.305–360.
CONCLUSION

There is clear evidence that the structure of company ownership can significantly influence the
financial performance of the company. Its impact on incentive mechanism, decision-making
procedures as well as performance-monitoring system. I summarize the theoretical evidence on
the effects of different ownership structures in terms of types of owners and the level of
ownership on the corporate performance. In India, ownership concentrated with Indian
promoters, thud the traditional culture of big corporate family owned companies prevail.
However, markets do not seem to get affected by concentration of ownership.
BIBLIOGRAPHY
Literarture Consulted:-

Books:

Singh Avtar, Company Law, 15th edition 2007, Eastern Book Company.

Majumdar A.K., Dr. Kapoor G.K, Taxmann’s Company Law, 12th edition 2009,

Taxmann Publication (P) Pvt. Ltd.

Statutes:

The Companies Act, 1956

The companies act, 2013

Web sources:

1: http://lawtimesjournal.in/ownership-concentration-indian-companies/

2: https://iimb.ac.in/research/sites/default/files/WP%20No.%20419_0.pdf