Chapter 1

INTRODUCTION

Contents
1. INTRODUCTION 1
1.1. Introduction 2
1.1.1. Defining Small and Medium Enterprises (SMEs) 2
1.1.2. SMEs and the Indian economy 4
1.1.3. Challenges For Indian SMEs 5
1.2. Recent Advancements: The SME Listing in India 7
1.2.1. SME Listing: Benefits for SMEs, Implications, and Results 7
1.2.2. SME Listing, Corporate Governance, and Financial Benefits 9
1.3. Background and Motivation for the Study 11
1.3.1. Listed SMEs and Distinct CG Treatment 14
1.4. Research Questions and Objectives 17
1.4.1. Research Questions 17
1.4.2. Objectives of the Study 18
1.5. Thesis Chapter Plan 20
1.6. Concluding Remarks 20

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1.1 Introduction

The study aims to examine the state of corporate governance (CG) and its interrelationship

with corporate financial performance (CFP) of listed small and medium enterprises (SMEs).

The study is staged in the context of emerging markets by selecting the study sample from

India. In this regard, this chapter aims to introduce the research study.

The chapter commences with globally relevant definitions of SMEs, including the one

accepted in the Indian context, in subsection 1.1.1. The first section is further presented in

subsections to briefly discuss SMEs' role in the Indian economy, followed by the challenges

faced by SMEs, predominantly concerning the financial dimension. The second section, 1.2,

outlines the recent advancements in the Indian SME landscape, particularly in SME listing

on the SME exchanges in India. This section then briefly presents the implications and

perceived benefits of public listing of SMEs, which leads to a discussion on why CG has

become immensely important for modern-day SMEs and why the financial problems and

CFP requires investigation in terms of SMEs’ CG practices. Next, section 1.3 discusses the

study's background and motivation, followed by section 1.4, which highlights the research

questions that the study intends to answer and the objectives of the current study. This is

followed by a brief outline of the thesis chapterization plan in section 1.5, and finally, the

concluding remarks in section 1.6 conclude the chapter.

1.1.1 Defining SMEs

The meaning and definition of SMEs have transformed incessantly to answer the changing

political, economic, and socio-cultural veracities. As a result, there exists no unanimously

accepted definition of SMEs, which are defined differently in different countries (Berisha

& Pula, 2015). The acronym SME is used by the European Union, the United Nations, and

the World Trade Organization. In the United States, these firms are often referred to as

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small-to-midsize businesses (SMBs) (Singh & Pillai, 2021). In spite of the variances in

terminology, nations share some commonalities in segregating businesses based on their

size or structure (Singh & Pillai, 2021).

SME definitions are highly discussed based on qualitative and quantitative characteristics

(Berisha & Pula, 2015; Singh & Pillai, 2021). Qualitatively, SMEs can be straightforwardly

distinguished from their larger counterparts in terms of ownership and management,

production type (capital-intensive versus labor-intensive), research and development

initiatives and investments, and sources of finance (Berisha & Pula, 2015). Contrarily,

quantitative criteria for defining SMEs include but are not limited to the number of

employees, turnover, balance sheet total, and assets (Singh & Pillai, 2021). The European

Union and the Organization for Economic Co-operation and Development (OECD)

countries like Australia, Canada, Korea, Mexico, New Zealand, Turkey, and the United

States demarcate the SMEs according to the number of employees. For example, a small-

sized enterprise has less than 50 employees, and a medium-sized enterprise has less than

250 employees in the European Union. In addition, the World bank standard includes

multiple quantitative criteria like the number of employees, total assets, and total annual

sales for defining SMEs. The micro, small and medium enterprises development (MSMED)

Act, 2006 classifies SMEs in India based on a composite criterion, including investment in

plant and machinery (P&M) or equipment and annual turnover. Table 1.1 presents the Indian

SME sector classification with effect from 01 July 2020.

Table 1.1. Classification of the Indian SME Sector

Classification Small Medium

Manufacturing and Investment in P&M or equipment ≤ Rs.10 Investment in P&M or equipment ≤

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1.1.2 SMEs and the Indian Economy

The World Bank states that SMEs render a substantial role in most economies, particularly

the developing ones. SMEs form the mainstream businesses worldwide and are indispensable

contributors to widespread employment and economic development by representing more

than 90% of the businesses and 50% of employment globally. In terms of national income

(GDP) in emerging economies, the formal SME sector alone contributes 40% share. These

statistics are suggestively higher when informal SMEs are encompassed.

The history of SMEs in India can be traced back to the Gandhian model of “Swaraj,” which

also means economic self-reliance. Post-independence, and with the liberalization policies of

the Indian government in 1991, SMEs have become one of the most distinguished stories in

the last three decades of industrial development.

The SME sector is the spine of the Indian economy (Singh et al., 2008). At 48 million, India

has the second-largest number of SMEs globally, close to China with approximately 50

million such businesses. Around six thousand products are manufactured by thirty percent of

SMEs, while the remaining seventy percent deliver various services.

If backed properly, this sector has the power to pivot industrial growth throughout the nation

(Singh et al., 2021). SMEs currently contribute more than 17 percent of India’s gross domestic

product (GDP). Moreover, SMEs represent over 90% of businesses and contribute to more

than 50% of national employment (Singh et al., 2008). Additionally, the mainstream

population in India is dependent on these firms for their livelihood, where more than forty

percent of India’s workforce finds employment in small and medium-sized firms (Singh et

al., 2021).

SMEs also help in the industrialization of rural & regressive areas, reduce regional inequities,

and enable fair distribution of national wealth. The Government of India (GOI) has, therefore,

accorded the highest priority to the SME sector because of its labor intensiveness, high

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employment generating capability, and a significant contributor to the growth and exports of

India (Kulkarni & Chirputkar, 2014). As a result, the SME sector has emerged as a vibrant

sector of the Indian economy, contributing substantially to national employment, exports, and

inclusive economic growth.

1.1.3 Challenges for Indian SMEs

The SME sector in India contributes immensely to the Indian economy. However, despite

its commendable contribution, the SME sector in India does not get the necessary support

from government agencies, banking and financial institutions, and other stakeholders, which

hampers its operations, growth, and expansion (Kulkarni & Chirputkar, 2014). As a result,

the Indian SMEs face numerous difficulties such as inadequate and timely bank finance,

limited capital, which ultimately spirals to deficient technology, inadequate production

capacity, ineffective marketing, restraints on modernization and expansions, scarcity, and

unavailability of skilled labor at affordable cost, among several others (Kulkarni &

Chirputkar, 2014; Singh et al., 2021; Thampy, 2010). Nevertheless, the most critical

challenge for SMEs across the globe has been an unmet financial gap. The International

Finance Corporation (IFC) states that formal MSMEs in emerging nations have 40% more

unmet financial needs than MSME lending worldwide.

In India, two major causes of financial challenges that impede the growth of Indian SMEs

include the lack of adequate access to finance and the SME-specific undeveloped financing

system (Thampy, 2010; Kulkarni & Chirputkar, 2014). For decades, SMEs have over-relied

on owners’ contributions or bank finance for sustenance. However, the contribution by

owners is usually limited by the owner’s own wealth and informal loans from relatives,

friends, and neighbors (Kulkarni & Chirputkar, 2014). On the other hand, bank finance is

usually capped by the available collateral. While the long-term debt is restricted by the debt-

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equity ratio and the acceptable collateral, the short-term funding has been subject to

maximum permissible bank finance. The financial challenges are further exacerbated by the

high-interest rates for SMEs post they avail an amount of the limit of Rs. 1 Crore, defined

by priority sector lending by GOI (Kulkarni & Chirputkar, 2014). In addition, SMEs face

constraints on total funds, including private equity and bank finance. In summary, the heavy

dependence on debt rather than equity and the cost of raising funds on the higher side for

Indian SMEs are the main financial challenges SMEs have faced for decades.

The second challenge of an underdeveloped financial system, primarily catering to the

financial need of SMEs, is still prevalent. SMEs are geographically dispersed and sometimes

find it challenging to access the required institutional support for functioning. Moreover,

SME-specific banking facilities may not be available in all areas, so there is a limitation to

bank credit (Kulkarni & Chirputkar, 2014). As a silver lining, this problem is reduced

substantially with advancing information and communication technology and e-banking

facilities.

Along similar lines, the Indian SME sector was deprived of direct access to public funding

through capital markets until 2012, when the SME listing platforms of the Bombay Stock

Exchange (BSE) – the BSE SME and the National Stock Exchange (NSE) Emerge started

functioning (Arora & Singh, 2020). Though there are attempts by the government and other

regulatory institutions (SEBI, BSE, NSE, among others) to provide institutional support for

SMEs to provide access to competitive finance, the financial challenges still haunt the SMEs

sector widely.

1.2 Recent Advancements: SME Listing in India

Perhaps the most significant and recent development in the Indian SME landscape is the

advent of SME exchanges, which provide a platform for SMEs to raise public funds via the

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 capital markets directly. Many countries allow SMEs to raise funds from the capital market

through the SME listing platforms like MOTHERS in Japan, Alternate Investment Market

(AIM) in the UK, TSX Venture Exchange (TSXV) in Canada, and GEM in Hong Kong

(Kulkarni & Chirputkar, 2014). However, in India, the sector was deprived of direct access

to public funding through capital markets until 2012.

SEBI has now permitted SMEs to raise funds from the capital market. The aftermath of the

OTCEI failure resulted in the Prime Minister‘s task force's enactment (Jan 2010), which

endorsed setting up stock exchanges specific to SMEs. Furthermore, the Securities and

Exchange Board of India (SEBI) amended the SEBI (Issue of Capital and Disclosure

Requirements) Regulations, 2009, espousing best practices from other countries via a

notification dated April 13, 2010 (Kulkarni & Chirputkar, 2014). Consequently, two SME-

specific exchanges, the BSE SME and the NSE Emerge, started functioning in India in

2012(Arora & Singh, 2020). Therefore, listing SMEs on exchanges is a recent phenomenon

in India (Singh et al., 2021).

1.2.1 SME Listing: Benefits for SMEs, Implications, and Results

It is expected that listing will unlock several benefits for SMEs, investors, capital markets,

banks, and the economy at large (Kulkarni & Chirputkar, 2014). The listing has provided a

notable status to SMEs in India (Singh & Pillai, 2021). The BSE SME website claims that

the SME exchanges offer SMEs an entrepreneur and investor-friendly environment, enabling

these firms to move from an unorganized sector into a regulated and organized one. By

stepping into the threshold SME listing platforms, the SMEs foray into the world of finance

for further growth and development. The entrepreneurs and promoters can raise equity capital

for the growth and expansion of their SMEs in a competitive (or cost-effective) manner. In

addition, listing uplifts SMEs' status and prestige, increases credibility, and enhances

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financial status, increasing demand for the shares and higher valuation.

SMEs' over-dependence on bank credit has always affected their growth and expansion plans.

By raising equity, SMEs will reduce reliance on debt. Such restructuring of capital structure

is expected to help SMEs considerably (Kulkarni & Chirputkar, 2014). In addition, the

doubtful loans of SMEs can be converted to equity, thereby reducing the non-performing

assets of the banks. As long as SME is not referred to as Board for Industrial and Financial

Reconstruction (BIFR), raising equity from the capital market is allowed. However, recent

studies claim that SMEs have not availed such benefits of listing as per expectations. It is

seen that the SMEs still prefer internal funding first and then debt and finally choose to raise

external equity (Singh et al., 2021).

Kulkarni and Chirputkar (2014) claim that the CFP of SMEs would be impacted, perhaps in

a positive way, post listing. It can be claimed that all the benefits of listing can be summed

up in terms of its effect on CFP. However, recent studies on listed SMEs in India raise several

questions. The performance of SMEs post-listing has not been very impressive (Arora &

Singh, 2020; Dhamija & Arora, 2017). In addition, the fact that only 364 SMEs have so far

been listed (as of March 2022) on the BSE SME exchange questions the readiness and

willingness of the SMEs to avail external equity through the exchanges. Table 1A.1 in

Appendix 1.A depicts the market statistics from the BSE SME Exchange in this context.

Though the listing is expected to cause an overall positive impact on the SME landscape in

years to come, there should be willingness and readiness to avail the listing facilities by the

SMEs. While the willingness is subject to SME owners' discretion, needs, and thought

process, the readiness is mainly related to strategy market timing and readiness to adhere to

the listing requirements. Only willingness, however, is not a sufficient condition for SMEs to

get listed until they are ready to meet the regulatory and compliance requirements of the SME

exchanges. For the listing, SMEs must follow SEBI guidelines and guidelines of respective

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stock exchanges. The guidelines mainly include criteria of net tangible assets, net worth,

distributed profits, any reference to BIFR, market making, and underwriting (Kulkarni &

Chirputkar, 2014).

Though the Indian institutional support system is developing, the SME sector is unable to

take full advantage of this development. To leverage the benefits of the larger financial

ecosystem that is welcoming the SME, two conditions should be met. First, the SME owners

should be willing to part with their equity and their willingness to become a larger and more

modern financial ecosystem. Second, the credibility of these SMEs and their business

practices should be strengthened so that the SMEs comply with the regulatory framework

required for listing on SME exchanges. Therefore, although the listing of SMEs is essential

to profitability (Kulkarni & Chirputkar, 2014), it is not by itself a sufficient condition to

achieve superior CFP.

1.2.2 SME Listing, CG and CFP

A closely woven changing aspect linked to SME listing, which in all likelihood can impact

the financial outcomes, is adhering to good business practices and regulatory mandates. The

listing has indisputably elevated SMEs' business behavior and practices by virtue of the added

visibility. In this regard, it can be argued with confidence that the listing of SMEs calls for

sound and good business practices, leading to a greater necessity for good CG frameworks

(Singh et al., 2021).

The infusion of public funds has created a need and a ground for developing good governance

practices. The ownership separation due to external equity has paved the way for agency

issues to occur, which can be dealt with with sound governance policies. In addition, the

SEBI regulations (for listed companies have invoked the essence of CG mechanisms like

board composition, diversity, and procedures.

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Furthermore, the compliance and disclosure requirements of the SME exchanges have

enabled information disclosures for SMEs. The added visibility on account of listing has

irrefutably intensified the market competition (which in literature is claimed to be a form of

external regulation or governance form) that the Indian SMEs face. This changing landscape

of Indian SMEs has therefore made sound control and monitoring mechanisms indispensable

in view of the credibility of these businesses.

Literature signifies that good CG is a critical path a firm should take to elevate credibility.

This credibility, attributed to healthy business practices, has several tangible and intangible

benefits for firms (Singh & Pillai, 2021). In a similar line, the OECD claims that “good

corporate governance helps to build an environment of trust, transparency, and accountability

necessary for fostering long-term investment, financial stability, and business integrity,

thereby supporting stronger growth and more inclusive societies.” As per the claim from

Economist and Nobel Laureate, Milton Friedman “corporate governance is to conduct the

business in accordance with the owner’s or shareholders’ desires, which generally will be to

make as much money as possible while conforming to the basic rules of the society embodied

in law and local customs.” The definition is grounded on the economic thought of market

value maximization. Shleifer & Vishny (1997) express that CG is an act in which the fund-

providers assure themselves of acceptable returns on the capital deployed. In addition, CG

also refers to the regulations, laws, and transparent business practices that superintend

business execution between the owners and stakeholders. Likewise, Huse (2000) indicates

CG as the interaction among internal stakeholders, external stakeholders, and the board

members in directing a firm for value. These definitions add the lines of accountability of the

businesses towards the fund providers in the financial dimension, signifying that the financial

problems of SMEs certainly need to be investigated in terms of CG practices (Singh & Pillai,

2021).

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Therefore, the current study takes the route of CG to investigate its impact on the CFP of

listed SMEs. In doing so, the study draws inspiration from the claim that listing the

profitability of SMEs, perhaps in a positive way (Kulkarni & Chirputkar, 2014). Therefore,

the study discusses the CFP of listed SMEs in light of changing CG practices. While

examining the state of CG practices and their impact on CFP, the study assumes that the CG

practices of SMEs are at a nascent stage and cannot be necessarily benchmarked against

globally accepted standards or comparable to the seemingly mature CG practices of large

publicly listed corporations. However, the study strongly assumes that CG has gained

immense importance for modern-day SMEs, where public listing is one of the forces driving

their CG dynamics vigorously. In addition, to begin with, the study also assumes that these

governance practices in some way should exhibit a relationship with the CFP of listed SMEs.

The empirical evidence and quantification of such an impact of CG practices on CFP

performance is an area of investigation undertaken in this study.

1.3 Background and Motivation for the Study

CG is right in the middle of a paradigm shift. The recent corporate scandals and financial

misappropriations have made CG a widely debated subject amongst academics, policymakers,

and practitioners worldwide (Younas et al., 2021). As a result, good governance has become

essential for all firms, including SMEs (Saxena & Jagota, 2015). Besides, the necessity for CG

in SMEs stems from the public listing on SME exchanges – a novel practice in many emerging

economies, including India. In India, the listing of SMEs started in 2012 with BSE SME and

NSE Emerge platforms (Kulkarni and Chriputkar, 2014).

The public listing of SMEs challenges and attempts to fine-tune several CG mechanisms,

namely, ownership structures, management accountability, board functioning, and information

disclosures, among others. Besides, SME listing adjusts the exposure of SMEs to market

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competition, which is a well-recognized form of external governance or firm regulation (Arora

& Bodhanwala, 2018; Chou et al., 2011). The shifting landscape of modern-day SMEs makes

good governance practices inevitable, which is a welcome move. Therefore, according to a

World Bank statement, emerging economies are highly cognizant of good CG practices. Good

CG practices can enable the firms to access affordable external financing and improve their

CFP and stability, leading to overall economic growth.

However, most CG reforms and studies revolve around large public entities (Gordon et al.,

2012), whereas the implementation of CG practices and their payoffs remain overlooked to a

great extent in the case of SMEs. Therefore, more attention needs to be paid to CG mechanisms

and processes involving firms in earlier life cycle stages (Filatotchev and Wright, 2005;

O’Connor & Byrne, 2015). The current financial ecosystem and developing markets offer

prospects for SMEs to participate, learn and adapt to good governance practices. Notably, the

SME Listing in India has been a significant reform for early-stage ventures and small firms.

The listing of SMEs on the SME stock exchanges has amplified the visibility and impacted the

valuation of these firms (Singh & Pillai, 2021). Listed SMEs' focus is on setting a higher

valuation for their businesses through increased CFP. These firms concentrate on operational

efficiency and profitability to enhance value per share. Transparency and effective governance

enable SMEs to attain their goals of value maximization (Singh & Pillai, 2021). SME exchange

in India underlines the profitability and firm valuation (Kulkarni and Chirputkar, 2014) for

investor confidence through the system of CG (Singh & Pillai, 2021).

The OECD's definition implies that good CG creates an environment of trust required to foster

business integrity and financial stability (OECD, 2005). In literature, well-governed companies

exhibit long-run financial results and sustainable growth (Singh & Pillai, 2021). Good

governance benefits the firms in several ways – one of them is its positive influence on CFP.

Therefore, studies are now emerging on the importance of CG and how it acts as a value driver

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for firms (Mishra & Mohanty, 2014) in many emerging countries, including India (Agyemang

and Castellini, 2015; Arora and Sharma, 2016; Bhatt and Bhatt, 2017; Darko et al., 2016;

Mohanty and Mishra, 2021; Rajput and Jhunjhunwala, 2019; Wahyudin and Solikhah, 2017).

In this line of research, several studies in the literature have linked CG with CFP (Afrifa &

Tauringana, 2015; Al-ahdal et al., 2020; Chhaochharia & Grinstein, 2007). While a portion of

literature advocates a strong positive association (Abor & Biekpe, 2007; Afrifa & Tauringana,

2015; Arora & Bodhanwala, 2018; Arora & Sharma, 2016), some studies found an inverse

association between governance variables and CFP (Bennedsen et al., 2008; Li et al., 2020; Li

et al., 2015). Besides, some scholars discovered that CG variables (like ownership) do not

directly influence performance (Demsetz & Villalonga, 2001) while pointing out the

endogenous nature of CG. Though CG and CFP are widely discussed and debated, the linkage

has remained largely inconclusive in terms of the varied results that the literature signifies

(Panayi et al., 2021).

The fact that the extant literature implies mixed results on the CG -CFP nexus is due, at least

in part, to the examination of CG mechanisms in seclusion from each other, without

considering their combined effects (Aguilera et al., 2012; Oh et al., 2018; Panayi et al., 2021).

In order to overcome this limitation, an all-inclusive approach to CG is gaining importance in

the academic literature. This approach is widely known as the configurational perspective or

approach of CG. The configurational perspective implies that the substitutive and/or

complementary effects between several individual CG forms lead to multiple “combinations”

or “bundles” of such mechanisms (Panayi et al., 2021; Rediker & Seth, 1995). The

configurational approach is expected to provide a better understanding of the agency dynamics

resulting from the interaction effects of the individual CG forms.

The bundles of CG mechanisms suggest mutual interactions that work effectively towards

specific firm outcomes (Aguilera et al., 2012; Panayi et al., 2021), like CFP as in this study. In

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this context, (Rediker & Seth, 1995) claim that “firm performance depends on the efficiency

of a bundle of governance mechanisms” (Panayi et al., 2021). Therefore, it is fairly reasonable

that the individual CG forms operate jointly to drive the outcomes (Aguilera et al., 2012), as

the CFP of listed SMEs in the current study. The hypothesis of the configurational perspective

may provide beneficial results for listed SMEs under the assumption that their individual CG

mechanisms are at a nascent stage and not so mature enough to drive CFP when acting in silos.

Instead, it is worth investigating the joint efforts or interactions of individual CG practices in

driving the CFP of listed SMEs in India. This is because CG forms share a joint goal and

collectively constitute the organizational context for the governance environments, but they

have different characteristics, roles, and functions (Panayi et al., 2021). Thus, to understand

how organizational outcomes like CFP are affected by multiple CG forms, an investigation of

their interactive influence is essential (Oh et al., 2018). However, there has been limited

empirical research into this configurational perspective of CG (Panayi et al., 2021). There is

hardly any study that has explored the configurational approach of CG for listed SMEs.

Based on the arguments mentioned above from the extant literature, the current study

considers CG as a driver of CFP of listed SMEs. Therefore, the study first intends to examine

and explore the current state of CG practices in listed SMEs and then test the impact of CG

on CFP. Testing the impact of CG on CFP is considered from two perspectives. First, the

impact of individual CG mechanisms on CFP is examined to validate the effectiveness of

such CG forms when they act in silos. Second, the configurational perspective of CG is tested

to examine if such an approach validates the impact of CG on CFP for listed SMEs (Aguilera

et al., 2012; Oh et al., 2018; Panayi et al., 2021).

1.3.1 Listed SMEs and Distinct CG Treatment

The diverse set of conclusions on the above-mentioned linkage between CG and CFP specifies

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that the former is not a one-size-fits-all solution, and its impact on the latter differs contextually

(Gerged & Agwili, 2020). Furthermore, it is established that the state and benefits of CG are

subject to the firm’s life cycle, particularly producing better results when tailored to the specific

stage of the firm's life cycle (Novaes & Almeida, 2020; O’Connor & Byrne, 2015). The results

are further complemented if the design of CG policies and procedures resonate well with the

respective economic setting where the firm operates (Bhagat et al., 2008; Madhani, 2016). In

that sense, attention to economic setting and firm-specific characteristics is essential for CG

studies.

The state of CG differs with different stages of the lifecycle of the firms (Novaes & Almeida,

2020; O’Connor & Byrne, 2015). Therefore, a distinct treatment of listed SMEs is required in

terms of their CG practices. SMEs are incomparable to large corporations in multiple ways

(Saxena & Jagota, 2015). Heterogeneousness in operations, the miscellany of firms, and

geographical dispersal are the structural barriers for SMEs. Besides, informal, and complex

structures restrict the implementation of CG for SMEs (Gordon et al., 2012). Most governance

studies have inadequate consent on the applicability of CG in SMEs (Gordon et al., 2012;

Tshipa et al., 2018). However, CG is the core of value creation which prominently exists for

large listed enterprises in India (Singh & Pillai, 2021). All CG regulations and aspects of large

publicly listed and mature corporations may not apply to listed SMEs similarly (Singh & Pillai,

2021). Though the listing of SMEs makes the adoption of CG critical (Gordon et al., 2012),

and separation of ownership and management has become indispensable, the effect is less

pronounced for listed SMEs than their large publicly listed corporates. Therefore, an

expectation that listed SMEs exhibit governance characteristics similar to large corporates may

lead to what we call "corporate governance myopia" in this study.

Moreover, we define corporate governance myopia as a short-sightedness towards the CG

attitude, where similar outputs are expected from CG in listed SMEs and large corporations

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with more mature business practices. Besides, some leniency in regulations and reporting is

provided to listed SMEs in India compared to large corporations (Singh & Pillai, 2021). For

example, the listed SMEs in India are expected to provide six-monthly financial reports

compared to the mainstream publicly-listed corporates, which are mandated quarterly

reporting.

Distinct from large companies, SMEs are either privately held family-owned businesses or

listed SMEs with concentrated promoters’ ownership. Defining power and distribution of

ownership is challenging as owners also act as the managers of these businesses. The board is

small. The board size for listed SMEs where the average board size (mean value of the board

size = 5.24, calculated for the sample of this study) is almost nearly half of the board size in

larger corporates (mean board size = 9.65) in India (Arora & Bodhanwala, 2018). The board

composition lacks diversity. The inaccessibility and dearth of independent expert directors and

the limited formalized contracts generate room for fraud and misappropriations (Singh & Pillai,

2021). In addition, the true independence of the independent directors and a pool of capable,

independent directors willing to invest time and efforts for listed SMEs is a pressing need,

challenge, and a question in the Indian scenario (Singh & Pillai, 2021).

Further issues that add to the plethora of challenges for listed SMEs originate from their limited

adherence to existing regulations and CG best practices. In particular, though a comprehensive

and well-framed set of CG regulations are in place, their adherence has widely remained

questionable in India (Arora & Bodhanwala, 2018). The same is applied to listed SMEs, which

fail to follow the standard business practices based on their limited capacity. Therefore, listed

SMEs differ from large corporate houses in various aspects and cannot be governed like large

corporates (Saxena & Jagota, 2015). All these issues inspire the inevitability and need for

special treatment for SMEs in terms of their CG practices.

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1.4 Research Questions

Given that the listing of SMEs is a recent phenomenon in India, the CG practices in these

firms are at an emergent stage. Therefore, it can be argued that these CG practices require

their own time to attain maturity. In addition, though the applicability of CG rules and

mandates for listed firms is applicable on listing, the adherence to all such norms has always

remained a challenge in India (Arora & Bodhanwala, 2018). These arguments and claims

raise some important questions on the current state of governance practices in listed SMEs

and their efficiency and impact on CFP. However, the current SME landscape literature

indicates several unanswered questions, especially in the Indian context. These questions

(RQs) pertain to India’s CG and CFP of listed SMEs.

⎯ RQ 1: What are the payoffs derived by SMEs on listing, particularly in terms of their

corporate governance practices?

⎯ RQ 2: What are the corporate governance policies of SMEs? Do these practices and their

impact differ for listed SMEs and larger public companies?

⎯ RQ 3: Does the listing of SMEs influence the quality of information disclosure practices of

SMEs?

⎯ RQ 4: Do corporate governance practices and quality of information stimulate financial

performance and enhance firm value for listed SMEs?

1.5 Objectives of the Study

The objectives of the current study relate to the investigation of the current state of CG for

listed SMEs in India and how its impacts the CFP. In addition, the research aims to achieve the

following objectives (OBJs) for SMEs listed on SME Stock Exchange.

OBJ 1: To review the corporate governance practices and contextualize how these governance

practices influence the corporate financial performance of listed SMEs.

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OBJ 2: To investigate the relationship of corporate governance and information disclosures

with the financial performance of listed SMEs.

OBJ 3: To examine the governance measures that influence the firm value of SMEs. To

investigate the relationship of corporate governance with firm value.

OBJ 4: To recommend governance practices and how they would enhance financial

performance and firm valuation of SMEs.

1.6 Thesis Chapter Plan

Chapter 1 Introduction: The chapter introduces the study by defining SMEs, their role in the

Indian economy, and the major challenges. After that, the chapter provides an overview of the

recent advancements in the SME landscape, particularly in relation to the contemporary

practice of SME listing on SME exchanges in India. Then a discussion on the implication of

listing SMEs follows a justification for why corporate governance has become indispensable

in modern-day SMEs. The chapter then discusses the background and motivation for the study,

followed by research questions that the study intends to answer. Finally, the study's objectives

and a brief outline of the thesis chapterization plan are included.

Chapter 2 Review of Literature: The chapter starts with an introduction section on how the

chapter is organized. After that, the chapter outlines the theoretical framework that would

enable the examination that this study aims to undertake. The literature review section that

follows the theoretical framework is presented in two sections to match the two perspectives

undertaken to examine the impact of CG on CFP. At first, the chapter entails the first

perspective where the individual CG mechanisms are considered to act in silos and impact the

CFP of listed SMEs. The second subsection considers the configurational perspective of CG,

where the individual CG mechanisms are expected to act in bundles or interact with each other

to impact the CFP for listed SMEs. The literature review chapter ends with identifying research

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gaps for the current study relating to the interrelationship of CG with CFP. This chapter is

linked to the study's first objective, as stated above.

Chapter 3 Data and Methodology: The chapter states the hypotheses of this study and how

they have been arrived at. It details the data collection process and data sets used for different

study sections. The research methodology used and the statistical tools used have also been

explained. Pertinent literature related to the method selected for analysis has been included in

this chapter.

Chapter 4 Corporate Governance and Financial Performance: This chapter describes the

outcome of the data analysis conducted to test the impact of CG on the financial performance

(FP) of listed SMEs in India. The analysis and results are presented in two sections. At first,

the study entails the first perspective where the regression results on how the individual CG

mechanisms (when considered to act in silos) impact the FP of listed SMEs. The second

subsection presents the regression results from the configurational perspective of CG, where

the individual CG mechanisms are expected to act in bundles or interact with each other to

impact the FP for listed SMEs. Finally, the chapter includes a summary of the results. This

chapter is linked to the study's second objective, as stated above.

Chapter 5 Corporate Governance and Firm Value: This describes the outcome of the data

analysis conducted to test the impact of CG on the firm value ( of listed SMEs in India. The

analysis and results are presented in two sections. At first, the study entails the first perspective

where the regression results on how the individual CG mechanisms (when considered to act in

silos) impact the FV of listed SMEs. The second subsection presents the regression results from

the configurational perspective of CG, where the individual CG mechanisms are expected to

act in bundles or interact with each other to impact the FV for listed SMEs. Finally, the chapter

includes a summary of the results. This chapter is linked to the third objective of the study, as

stated above.

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Chapter 6 Findings, Discussion, and Recommendations: The chapter comprehensively

discusses the study's findings from Chapters 4 and 5. The chapter also includes the

recommendations for listed SMEs to revamp their CG framework. This chapter is linked to the

fourth objective of the study, as stated above.

Chapter 7 Conclusion: The chapter concludes this study with a consolidated summary of

findings, recommendations, implications, contributions, limitations, and the scope of future

research.

1.7 Concluding Remarks

This chapter introduces the research study, provides a background and the motivation to carry

out this study, outlines the research questions and the definition of its objectives, and the thesis

chapter plan. The next chapter summarizes the literature reviewed for the study and the gaps

identified post literature review and before undertaking the study.

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