Corporate Governance in India: Scams, Legal Framework, and Challenges for the Future

Corporate Governance in India Scams

The Indian economy in the 20th century witnessed a very glossy time due to privatization, globalization, and liberalization. The existence of Corporate Governance in India and across the world was the result of capitalization, growing corporate culture in the economy, and business ethics due to which India for the first time was with the world economy for the product, capital, and sustainability of its economy.

Corporate Governance is perhaps one of the most important factors in an economy that has a direct impact on the profitability, growth, and sustainability of a business. It is a multi-tiered process that is treated as an organization’s culture, its policies, its governing values, and ethics constituted of the people running the business and the process by which it deals with various stakeholders. Corporate governance can be defined as the structure and the system of control by which the managers, Board of Directors become responsible for all the stakes of the stakeholders present in the organization be it internally or externally. In other words, all the mechanism and the processes by which the organization governed is collectively called Corporate Governance. An organization that is run by several participants such as the board of directors, shareholders, auditors, managers, etc. is bound to have a governance structure and principles which include rules and regulations for making any kind of decision in corporate matters.[1]

Corporate governance is the need for every organization due to fact that it doesn’t allow the organization to go through a conflict of interest between its shareholders and the managing teams and other stakeholders. Hence, it is the process through which an organization’s objectives are framed and used in the social, regulatory, and market environment. This also includes monitoring the legal policies, the ongoing practices, the actions, and the decision made by the organization.

Scams that occurred in India

  1. Satyam Scam:

In the year 2009, a Corporate scandal occurred which affected an Indian company called Satyam Computer Services. In this scandal, the chairman of the company Mr. Ramalinga Raju admitted about the manipulation of the company’s accounts.[2] This corporate scandal was estimated to be approximate Rs.7000 crore. An e-mail was sent to SEBI by Ramalinga Raju where he confessed to having manipulated the cash and bank balances of the company. He also said in an interview that Satyam, being one of the largest IT companies in India had the leveraging capacity to raise Rs. 15,000 to Rs. 20,000 Crore by just maintaining a cash balance of Rs. 4000 crore. Later in the year 2015, Ramalinga Raju was convicted with 10 other members. A jail term of 6 months was given to Ramalinga Raju and three other members by the Serious Fraud Investigation Office (SFIO) in the year 2014. The auditors like Price Waterhouse Coopers (PWC) had a really tough time auditing Satyam Computer Service.

  1. Ricoh Case:

The Ricoh scam was almost a replication of the Satyam Scam in the terms of accounting fraud and the fraud of stock prices and that too without any promoter being the highlight.[3] Only a couple of degenerate administrators were adequate to destroy the framework with the typical disappointment of the primary controlling foundations, for example, the reviewers, credit rating agencies, free executives of notoriety, boards of trustees of chiefs including the incredible review advisory groups kept an eye on by autonomous executives.

  1. ICICI Bank Scam case:

It was the job of the Board in speedily giving a clean chit to its CEO without the consequences of an autonomous examination released in the public domain in an evident instance of supposed nepotism, and its refusal to make any inquiries on the issue.[4]

  1. Kingfisher Airlines and United Spirits Case:

It was altogether apparent that assets had been moved from United Spirits Ltd. (USL) to finance Kingfisher, that United Breweries (UB) Holdings was used as a channel for raising loans and offering them to his gathering, that inter-corporate credits were given to related gatherings without the Board and its endorsement, accounts were improperly communicated, reviews were staged to be overseen, and so on during the period, Mr. Vijay Mallya was answerable for USL.[5]

Reformation in Corporate Governance

First Phase – 1996-2008

This stage was also known as the primary or the first stage of India’s corporate governance which completely focused on making audit committees and making the boards more independent, focused, and powerful which can supervise the management and can lead shareholders which include institutional and foreign shareholders or investors in the management.

(a) CII – 1996

The CII is the year of 1996, took up the first institutional initiative in the Indian industry which took a special step on corporate governance. The aim was to promote and develop a code for companies to be in the public sector or private sector financial institutions or banks and it was for all the corporate entities. The steps which were taken by CII was addressed with the public concerns regarding the security of the interest and concern of the investors which mainly focused on the small investors and the Encouragement of transparency inside industry and business went about as a need to approach towards the international standards of disclosure of information by corporate bodies and through the entirety of the means the point was to construct an elevated level trust in business and industry from the open market perspective. The final draft of the squad was introduced in April 1998.

(b) Report of the Committee by Kumar Mangalam Birla on corporate governance

Mr. Kumar Mangalam Birla who is also an industry list was appointed by SEBI as the chairman to provide comprehensive detail of the concerns related to insider trading to secure the rights of several investors. The suggestions insisted on listing the companies for initial and continuing disclosures within specific dates, through the listing agreement. The companies were supposed to disclose their annual reports separately and report on corporate governance and all the steps that they have taken to comply with the recommendations of the committee. The objective was to enable the shareholders to know where the companies have a stand and in which they have invested concerning specific initiatives that were taken to ensure growth in corporate governance.[6]

(c) Clause 49

This very committee realizes the importance of the auditing body and made many specific suggestions related to the constitution and function of the board audit committees. At that time, SEBI reviewed its listing contract to include all the recommendations which were put forward. These rules and regulations were listed in clause 49, a new section which was enforced of the listing agreement which came into force in phases of 2000 and 2003.

(d) Report of the advisory group on corporate governance on International Financial Standards and Code in March 2001

The advisory group tried to compare the corporate governance in India with the international best standards and also advise to improve the corporate governance standards in India through which the market structure of India concerning the small investors and the shareholders could improve competitively.

(e) Report of the group of directors of banks in April 2001

The directors of banks and financial institutions were further observed by reserve bank to review the corporate governance which was present in all these institutions and the supervisory role of boards of banks and financial institutions to get the feedback of all the activities of the board’s compliance, transparency, audit committees, etc. and also to provide suggestions for the making or the role of all the board of directors which would make the entire structure to be more effective with the perspective to mitigate or reduce the risks.

(f) Report of the Committee by Naresh Chandra on Corporate Audit and Governance Committee in December 2002

This committee took the charge of the task to analyze and suggest all the changes in different areas like the statutory auditor and the company relationship for the procedure of appointment of all the auditors and the determination of all the audit fees and also the restrictions if they are required for all the non-auditory fees. It also provided measures to ensure that the management in the companies was put forward with a true and fair statement of all the financial affairs of the said company.

(g) SEBI Report on Corporate Governance (N.R. Narayan Murthy)—February 2003

To improve the governance standards SEBI constituted a committee to study the role of all the independent directors, the related parties, all the risk management, the directorship, and the director compensation concerning the codes of conduct and financial disclosures.

(h) (Naresh Chandra Committee II) Report of the Committee on Regulation of Private Companies and Partnerships

As there was a large number of private sector companies who were coming into the picture so there was a need to revisit the law. To build upon the legal framework this time, the government committed in January 2003 to ensure a scientific and rational regulatory environment. The main focus of this report was on the Companies Act, 1956 and the Partnership Act, 1932.

(i) Clause 49 Amendment—Murthy Committee

In 2004, SEBI further brought many changes in clause 49 with the accordance of the Murthy committee’s recommendations. The implementation of these changes was postponed till 1st January 2006 because of the lack of preparedness and the industry resistance to accepting such wide reforms. The Murthy report is directly responsible for numerous changes in clause 49. The requirements of governance concerning corporate boards, audit committees, shareholder disclosure, and CEO certification of internal controls which constitutes the largest transformation of the governance in the Indian companies.[7]

Second Stage of Corporate Governance after the Satyam Scam

India’s corporate entities experienced a significant upset in January 2009 with vandalizing all the revelations about board failure and the gigantic fraud in the financials of Satyam. The Satyam scandal also catalyzed for the Indian government to rethink about the corporate governance, all the disclosure, and accountability of the mechanisms which operate. The industry response shortly after the news of the scandal broke and the CII started examining the corporate governance issues which were arising out of the Satyam scandal. In the year of 2009, a CII task force was put forward for the corporate governance reform recommendations. In this very report, the CII emphasized the unique nature of the Satyam scandal noting that Satyam is one of the incidents where the Overwhelming majority of corporate India is well run and well regulated and does business legally. Furthermore to the CII, the chamber of commerce of IT BPO industries in India along with the National Association of Software and Service Companies as the Premier trade body also formed a corporate governance and ethics committee which was further chaired by N.R. Narayana Murthy, one of the founders of Infosys and a leading figure in the Indian corporate governance reforms and the committee issued its recommendations in 2010.

Legal Framework on Corporate Governance

1) The Companies Act, 2013– Many high-profile corporate governance failure scams like the stock market scam, the Ketan Parikh scam, the Satyam scam which was severely criticized by the shareholders called for a need to make corporate governance in India as transparent as it greatly affects the development of the entire country. The Indian Companies Act, 2013 introduced some progressive and transparent process and method which benefits the stakeholders, directors as well as the management of the companies. Several types of investment advisory services and proxy firms provide information to the shareholders about the regulations that are recently introduced which mainly aim to improve the corporate governance in India. Corporate advisory services are offered by advisory firms to efficiently manage all the activities of the companies to ensure the stability and the growth of the business and to also maintain the reputation and the sustainability for customers and clients. The top management that consists of the board of directors is responsible for governance. The directors must have effective control over all the affairs of the company which is in the interest of the minority shareholders. Corporate governance ensures the strict and efficient application of the management practices with legal compliance which are continuously changing in the business scenario in India.[8]

2) SEBI guidelines– SEBI is a governing authority having jurisdiction and powers over all the listed companies and which also issues regulations rules and guidelines to all the companies for the protection of investors and the minority shareholders. It issues guidelines that are advisory to all the corporate sectors which promote and effective control over all the corporate affairs of the country. The board of directors and the current corporate scenario follow the revised guidelines of the SEBI.[9]

3) Standard Listing Agreement of Stock Exchanges- This is for those companies whose shares are listed on the stock exchanges. Corporate governance is guided by clause 49 of the listing agreement before the introduction of the Companies Act, 2013 and also as per the new provisions of SEBI which has approved certain amendments in the listing agreement to improve the transparency in transactions of the listed companies and also giving a bigger part to the minority stakeholders in influencing their decision in the management.[10]

4) Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) – ICAI is an autonomous body that issues accounting standards and provides guidelines for the disclosures of financial information. Section 129 of the New Companies Act provides that the financial statements given should be true and have a fair view of the state of affairs of the company which will comply with the accounting standards notified under Section 133 of the New Companies Act.[11]

5) Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI) – ICSI is also an autonomous body which issues secretarial standards in terms of all the provisions of the new companies act. The ICSI has issued a secretarial standard on meetings of the board of directors and also secretarial standards on general meetings. The secretarial standards have come into force from July 1, 2015. Section 118 (10) of the New Companies Act, provides that every company should observe secretarial standards specified by the ICSI concerning general and board meetings.[12]

[1] This section draws heavily from the history of Indian corporate governance in Omkar Goswami, 2002, “Corporate Governance in India,” Taking Action Against Corruption in Asia and the Pacific (Manila: Asian Development Bank), Chapter 9

[2] HT Correspondent, Satyam Scam: All you need to know about India’s biggest accounting fraud, Hindustan Times, Apr 09, 2015.

[3] Aarati Krishnan, Trouble at Ricoh: A lot like Satyam, The Hindu Business Line, Feb 15, 2018.

[4] Andy Mukherjee, ICICI Board must answer for the scandal around Chanda Kochhar, The economic Times, Jan 31, 2019.

[5] Krishna Prasad, Kingfisher Airlinescase: HC dismisses United Breweries’ appeal against winding-up order, The Hindu Business Line,Mar 06, 2020.

[6] Asish K. Bhattacharyya, ‘Corporate Governance in India: Change and Continuity’, Oxford University Press (19 September 2016).

[7] Tricker, ‘Corporate Governance: Principles, Policies and Practices’, Oxford University Press India; Second edition (14 January 2013).

[8] The Companies Act, 2013

[9] The Securities and Exchange Board of India (Amendment) Act, 2002

[10] The Companies Bill, 2009

[11] Clause 49 of The Listing Agreement

[12] The Companies Act, 1956

Written by Shireen Sultana

Born and Brought up in Kolkata, Shireen is a law student from The Department Of Law, Calcutta University. Apart from perusing law, Shireen happens to be Kolkata’s Youngest Novelist being an eloquent writer. She is best known for winning the International Debate 2018 and becoming an eminent part of the Calcutta Debating Circle. She is a social activist involved in human rights and environmental causes.  

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