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Growth of Corporate Governance in the Era of scams

According to the recent polls on corporate governance many companies like Dr. Reddy�s Laboratories Ltd. and Tata Power Company Ltd. jumped up to top ranks for the first time and some remained in the list for years. One such company is Infosys which defines corporate governance as a technique of balancing societal and individual goals. It is about maximizing shareholder value legally, ethically, and on a sustainable basis.

We can call it a practice or a method or a tool devised by the legislature to ensure fairness to all the stakeholders of a company. The philosophy behind it is simple � a company is also expected to adhere to certain laws like a citizen is expected to adhere to laws for the harmony in the nation. However, a company is expected to only adhere to a practice based on conscience, openness, and accountability.

It is interesting to note how it emerged and expanded its root so deeply in India. Corporate governance in India developed in fragments. With each scam committed, the government tried to make it more stricter than ever. With every puncture created, there was a loss of crores suffered by the innocent investors. From 1988 where SEBI was just a regulatory body to 1992 where it became a statutory body, SEBI has grown since then but not because of the conscious efforts of the legislation but through various scams which reflected deep potholes in the system. But what are the issues in our system that give these companies to corrupt the system? Are the provisions that are weak or is it the regulations? Or maybe it is the inordinate delay in justice. The answer may be all of these.

SEBI�s development alongside scams
As a starter, the very famous Harshad Mehta case which was decided after his death is still one of the major pathbreakers in the role of SEBI in the history of Indian security market. Harshad Mehta was a well-known stockbroker who manipulated the stock market leading to inflation of stock prices. Although what Harshad Mehta did was not illegal but merely unethical. Illegality came into the scene when he misrepresented and misappropriated the money from the banks. Due to this, SEBI was granted a statutory status in 1992. With this development, SEBI introduced the revolutionary �listing agreement[1]� and NSE and BSE went online.

Although the SEBI was given the status of a watchdog of the securities market, but it still couldn�t ensure good governance in the companies. This was evident when Ramalinga Raju, founder and CEO of Satyam Computers Services, himself, wrote an email to SEBI, confessing his scam wherein he misstated his books of accounts and it cost approximately 14,000 crores to the market.[2]This massive scam could have never been detected by SEBI on its own. However, after the investigation, SEBI hit back hard and held several persons guilty including internal auditors of the company. The big name in the world of auditors, Price Waterhouse Coopers also faced a tough time. With this scam, SEBI grew a bit more stronger, showing the investors what�s it capable of. It also announced various amendments like the introduction of CFO[3], Independent Directors[4] and mandatory rotation of auditors[5], close monitoring of large transactions by SEBI itself etc.

However, In 2012, when SEBI found the Sahara India guilty of unusual fundraising activity through private placement[6]. It was the first time since its inception SEBI was able to detect a fraud on its vigilance. It led to the introduction of sec 42[7] in the companies Act, 2013 defining the term �Private Placement�.

Latches in the present Act
One of the major problems lies in the varied interpretation of the terms which usually overrides the philosophy and the jurisprudence of the law. In the case of ICICI Bank, Avista company which was held by Rajiv Kochhar, Chanda Kochhar�s husband�s brother, was advising on borrowings to other companies with the help of privileged information. Since the term �relative� in the act doesn�t include the husband's brother, the CEO, Chanda Kochhar was not held accountable in that regard[8].

Another issue which we witnessed in the case of famous jeweller Mehul Choksi�s Nakshatra Diamond company was that the promoter for the sake of the compliance, made random strangers their independent directors. CBI[9] found the independent directors of the company living in slums and chawl. As per the recorded statement by CBI[10], they were offered to 2 lakhs for signing some documents and attending the Annual General Meeting and they had no say in any matter whatsoever. Independent directors were introduced mandatorily to ensure transparency to the minor shareholders but the company found a new way to cover their frauds alongside complying with all the requirements.

Observations and conclusion
With time, institutions like SEBI, RBI, PFRDA, IBBI, IRDAI, ICSI, and ICAI[11] grew and widened their roles and responsibilities. They identified and fixed every loophole with every scam. SEBI, specifically, grew in different dimensions to regulate and protect the securities market and ensure fair play but its burden has increased since then. Due to the presence of multiple regulators in the market, companies take advantage of the complexities and it is easier for them to find the loopholes in the system.

Every time a fraud is detected, there is an introduction of new regulatory authority. This has led to the presence of multiple regulatory authorities. Despite so many regulatory authorities, Justice is never served on time and the faith of investors has subsequently diminished. There is a stringent need to formulate an umbrella organization other than the ministry of finance, to efficiently regulate and monitor these market regulators.

Although on papers, the Indian regulatory system is considered one of the most stringent system but in practicality, we all know the reality. We witness new frauds every year, newspapers are filled with the list of persons flying abroad after committing fraud worth of millions. When SEBI introduced clause 49[12] of the listing agreement it was introduced to ensure the good governance practices and to protect the investors. Unfortunately, it is still considered by many of the companies as a mere paperwork formality.

The problem couldn�t be solved until India will streamline its regulatory process and improves its disciplinary provisions. SEBI does not have the required teeth to penalize the faulty persons. Also these organizations have not been proactive and spontaneous in taking decisions. The reactions of these regulators have been slow which provides ample opportunity to the erring persons to escape. There have been sufficient evidences in this regard. Vijay Mallya, Nirav Modi are some persons to name a few. This has become a trend and it also encourages others to swindle the nation out of a large sum and record the break of previous scams, imprinting their names in the long list of contributors in the development of the regulatory system of India.

Also, the punishment is different on the papers but in reality its different. For instance, ICAI has strict codes for its members and provides for the suspension and strict action against the erring auditors but the records of the organizations tell us different stories. They are punished by a disciplinary committee and are finally let off with a fine of 5 lakh rupees.[13]

The cases remain pending in courts for years, despite of formulation of a special tribunal, NCLT in this regard due to which justice gets delayed. The Harshad Mehta case had been dragged for 27 years, even after his death. The case lost its relevance with the time except for those having pecuniary interest. Witnesses, evidences, and statements have lost their relevance. The accused was long gone.

Although some cases like Raj Rajrathnam (of Galleon Group hedge fund) insider trading case, was settled in about three years. Cases pertaining to economic offenses and scams should be responded well in time to avoid repercussions. The longer the case is dragged, the more it is favoured to the accused. There is an absolute urgent need to ensure that cases pertaining to economic offenses and scams should be dealt with more precision than other civil cases. They should be wrapped up in less time as possible. There should be strict laws for restricting the accused to escape the country till the time he is under investigation and trial.

To ensure good governance, we should always roll back to the objective of corporate governance. The objective was to ensure the profitability, stability, and transparency in the market. The high profile corporate scams like stock market scam, UTI scam, Ketan Parikh scam, Satyam scam completely ignored the legal and moral obligations. The list of these scams has been endless which is deeply criticized by the stakeholders. It has shaken the trust and faith of the investors from both big companies and regulatory authorities. To restore this faith, companies need to remember the sustainable way of governance and compete in manners that are not just legal but also ethical.

  1. Listing agreement is an agreement under which company is required to make certain disclosures and perform certain acts in order to be listed on stock exchange.
  2. See this page:
  3. CFO (chief financial officer) is the senior executive in a company who manages the financial actions like financial planning, cash flow, analysing financial strengths and weaknesses of the company.
  4. Independent director is a non- executive director of a company who does not have any monetary relationship with the company except for his remuneration. His role to help in improving corporate credibility and governance standards of the company.
  5. Companies have to mandatorily rotate their auditors (Individual or Firm) once the auditor has served office for a period of 10 or more consecutive years (Rotation Period).
  6. Private Placement of Shares is defined as an issue of invitation for purchase of shares sent individually to each investor, not through public offer for purchase of securities. It can only be sent to 50 or less people.
  7. Section 42 defined private placement for the first time in the act. It validated private placement up to 49 or less persons. As soon as the number of investors rose to 50 and beyond, the issue of shares would be declared a public offer and would have to be verified and approved by the SEBI.
  8. See this page:
  9. Central bureau of Investigation
  10. see this page:
  11. RBI- Reserve Bank of India
    PFRDA-Pension Fund Regulatory and Development Authority
    IBBI- Insolvency and Bankruptcy Board of India
    IRDAI- Insurance Regulatory and Development Authority of India
    ICSI- Institute of Company Secretaries of India
    ICAI- Institute of Chartered Accountants of India
  12. Clause 49 of the Listing Agreement is a complete guidance for corporate governance. It requires the company to comply with certain disclosure and requirements listed in the circular issued by the Securities and Exchange Board of India. Its purpose is to ensure complete transparency
  13. See this page:

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