The Governance Gap: Why US Investors in Indian Companies Are Playing by Rules That Don't Actually Apply

Let us begin with a premise that most investment professionals working in India will privately acknowledge but rarely commit to paper: the board of directors of a privately held Indian company is, in a great many cases, a legal formality rather than a governing body.

This is not a criticism of Indian corporate law, which has grown considerably more sophisticated over the past two decades. It is an observation about the distance between legal structure and operational reality—a distance that consistently surprises US investors who enter Indian markets with governance frameworks calibrated to the American corporate environment.

What the Companies Act Cannot Mandate

India's Companies Act, 2013 imposes a rigorous statutory framework on incorporated entities: mandatory board compositions, audit committee requirements, related-party transaction disclosures, independent director qualifications, and much more. For listed companies, SEBI's listing obligations layer additional governance requirements on top of the statutory baseline. On paper, the governance architecture of a mid-to-large Indian company is not dramatically different from its American counterpart.

The difficulty is that law can mandate structure. It cannot mandate culture. And the culture of corporate decision-making in India—particularly in family-owned businesses, which constitute the majority of mid-market companies that attract US investment—operates through channels that the Companies Act was not designed to regulate.

Decisions of genuine consequence are frequently made not in board meetings but in conversations between the founding patriarch and his trusted inner circle. That inner circle may include family members who hold no formal position, advisors who appear on no organizational chart, and long-standing business associates whose authority derives entirely from personal relationship rather than statutory role. The board meeting that follows is often a ratification exercise, not a deliberative one.

Why Independent Directors Are Not Always Independent

One of the more consequential governance illusions in Indian corporate practice involves independent directors. The regulatory framework requires them, specifies qualifications for them, and imposes duties upon them. What it cannot do is ensure that their independence is substantive rather than technical.

In practice, independent directors at many Indian companies are selected by the controlling shareholder, compensated through sitting fees and commissions that create implicit obligations, and socially embedded in networks that make genuine dissent professionally costly. This is not a universal condition—there are Indian boards with genuinely independent voices who exercise real oversight. But it is sufficiently common that US investors who treat independent director presence as meaningful governance assurance are often deceiving themselves.

The implications for minority investors are serious. Board approvals of related-party transactions, valuation decisions in secondary capital raises, and determinations about dividend policy may all be influenced by informal pressures that never appear in the minutes. An American investor seeking to challenge a board decision through formal channels may find that the statutory framework provides standing but not practical leverage.

Relationship Capital as Governance Currency

To understand Indian corporate governance, one must understand that relationship capital functions as a genuine form of authority in ways that American business culture does not fully replicate. A senior executive who has spent thirty years cultivating relationships with government ministries, state-level regulators, and sector-specific gatekeepers carries governance influence that is entirely invisible to a cap table analysis.

When that executive retires, departs, or becomes disengaged following an investment transaction, the company does not merely lose a manager. It loses a network. The regulatory accommodations that network sustained—approvals that arrived on schedule, inspections that concluded without incident, licenses that were renewed without complication—may begin to deteriorate in ways that are difficult to trace and impossible to quantify in advance.

For US investors conducting governance due diligence, this means that the question is not only "who holds formal authority?" but "who holds relationship authority, and what happens to that authority under various transition scenarios?" These are questions that require on-the-ground inquiry and candid conversation with people who have no incentive to provide candid answers. They are, nonetheless, among the most important questions a prospective investor can ask.

The Shareholder Agreement as False Security

US investors in Indian companies typically negotiate shareholder agreements that include protective provisions: information rights, anti-dilution protections, drag-along and tag-along rights, veto rights over major decisions, and dispute resolution mechanisms. These provisions are legally enforceable. They are also, in many cases, practically difficult to exercise.

The enforcement of minority shareholder rights in India has improved considerably, but it remains slower, more costly, and more uncertain than American investors accustomed to Delaware corporate law typically anticipate. More fundamentally, the protective provisions in a shareholder agreement are reactive instruments. They allow a minority investor to resist or challenge adverse decisions after they have been made. They do not provide meaningful influence over the informal decision-making processes through which those decisions are actually reached.

An investor who discovers that the controlling shareholder has directed a significant contract to a related party—not through a formal board resolution that triggers the veto right, but through an operational arrangement that the board was never asked to approve—may have a legitimate grievance and limited practical recourse.

Reorienting the Due Diligence Framework

The argument here is not that US investors should avoid Indian companies, or that Indian governance is inherently deficient. It is that the governance assessment tools most commonly employed by American investors were designed for a corporate culture in which formal structure and operational reality are reasonably well aligned. In India, that alignment is frequently imperfect, and the investment thesis should account for the imperfection.

A more effective approach begins with governance due diligence that goes beyond document review—interviewing employees at multiple levels, speaking with former executives and counterparties, and engaging Indian legal counsel who can assess the informal power architecture with the frankness that the transaction environment rarely encourages.

It continues with ongoing board participation that prioritizes relationship-building with the people who actually govern the company, not merely those who formally represent it. And it includes dispute resolution planning that is realistic about the limitations of contractual remedies and prepares for the possibility that protecting an investment may require navigating informal channels as much as formal ones.

At Advocate Vishwanath, we have counseled US investors through precisely these challenges—not by offering false assurance about governance frameworks, but by providing the honest, ground-level analysis that effective investment protection requires. The formal structure is the starting point. Understanding what lies beneath it is where the real work begins.