Structure of Corporate Finance and Corporate Governance in India

A significant difference between the financial structure of firms in developing countries and those in developed countries is that the former are far less dependent on internal finance than the latter. Moreover, Indian firms depend far more heavily on external debt as a source of finance than do firms in advanced countries. This paper argues that an adequate explanation for this would need to weave in two central issues - the institutional structure of the banking sector with government guarantees of stability and viability and the oligopolistic nature of maturing firms that are attempting to dominate the market. An explanation for the structure of corporate finance must, apart from institutional issues, attempt to fathom why the firm as an issuer of securities would resort more to debt than equity. The structure of corporate finance in India is thus the result of a banking system that is protected against failure, oliogopolistic market structures with uncertainty regarding the demand for products. The financing strategy adopted by firms in such an environment, the author demonstrates, is part of an attempt to achieve market dominance.