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Sonali Nagariya, SVKM Pravin Gandhi College of Law, Mumbai.
Date: 01.07.2021
GROWTH OF CORPORATE GOVERNANCE IN THE ERA OF SCAMS
Introduction
According to Institute of Chartered Accountants in England and Wales “Corporate
governance is that the system by which companies are directed and
controlled. Boards of directors are liable for the governance of their
companies. The shareholders’ role in governance is to appoint the
directors and the auditors and to satisfy themselves that an appropriate
governance structure is in place.” Corporate Governance is essentially all
about how corporations are directed, managed, controlled and held accountable
to their shareholders. In India, the question of Corporate Governance has
come up mainly within the wake of economic liberalization and de-regularization
of industry and business. With the rapid pace of globalization many
companies have been forced to tap international financial markets and
consequently to face greater competition than before.
According to the poll conducted by Asiamoney Infosys topped a poll on best
practices in corporate governance. It 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.
Corporate Governance and its scams
With the growth of corporate governance, there has been a high level growth in
corporate scams too. History of corporate world is fraught with
manipulations and scams. These corporate frauds are widespread, costly,
and multifaceted and adversely affect all stakeholders. Starting from the
‘first well-documented’ securities manipulation fraud, known as the ‘Dutch
Tulip Mania’ in 1636 and 1637 in the Netherlands, to ‘Glaxo China’ in 2014,
corporate frauds around the world, have rocked the company world
resulting, either in new or revamping of the older governance structures, codes
and guidelines. Corporate scams have emerged as the biggest risks which
companies are exposed to, and are increasingly becoming a big threat. Incidents
of frauds are increasingly at an alarming rate and within the process:
• Destroy the confidence of investors in stock markets
• Results in enormous destruction in wealth of investors
• Damage the reputation of the affected company, its management and board of
directors
• Erode ability of affected company to borrow and thus creating financial
stress.
Satyam, the face of Indian sunrise sector, and now identical to classic frauds
of Indian corporate is only one instance to recall, but the Indian economy has
been through various frauds in corporate, banking, insurance including the
regulatory and depository body of India, i.e. the NSEL scam worth crores to
name a few.
India’s biggest corporate heists
According to business standard reports here’s a snapshot of where things stand
as far as India’s biggest corporate heists are concerned –
SATYAM (2009)
Protagonist – B Ramalinga Raju & others
Amount – Rs. 7,200 Cr
What was it about? –
An accounting scandal where Ramalinga Raju confessed to having cooked up the
accounts of Satyam Computers and inflated its bank balances. He has, along
side his relations , also been accused of laundering money through a mesh of
many companies.
Status:
Out of jail, on bail! Raju walked call at late November 2011 after spending 32
months behind bars after the CBI did not charge him on time and therefore the
ED delayed launching prosecution because of lack of clarity on which court
will hear the matter. Not just Raju, but all the 10 co-conspirators are
also out on bail. The CBI is is believed to be nearing completion of the case. But
with the ED chargesheet, which incorporates 37 other individuals aside from the
ten prime accused and 166 companies, just being filed, it could take longer
before there is closure to this case.
KETAN PAREKH SECURITIES SCAM (2001)
Protagonist – Ketan Parekh
Amount – Rs. 1,250 Cr
What was it about? –
Parekh was involved in circular trading and stock manipulation through
1999-2001 during a host of companies. Like his mentor Harshad Mehta, Parekh too
borrowed from banks like Global Trust Bank and Madhavpura Mercantile
Co-operative bank, and manipulated a number of stocks popularly referred to as
K-10 stocks.
Status:
Parekh has spent just one year in jail but has been banned from trading within
the Indian stock markets till 2017. His name though, continues to haunt the
road as he has been accused of pulling the strings from the backstage. An
IB (Intelligence Bureau) report last year alleged that Parekh and his
associates were still engaged in circular and insider trading through front
entities, but it was very difficult to establish his complicity because
these were largely benami transactions.
SPEAK ASIA SCAM (2011)
Protagonists: Harender Kaur, Manoj Kumar Sharma, Tarak Bajpai & others
Amount – Rs. 2000 + Cr
What was it about? –
An online business survey firm that collected thousands of crores of rupees
from over 24 lakh investors, asking them to fill surveys and guaranteeing to
quadruple their income in one year, Speak Asia was accused of running a
Ponzi scheme. A criminal case was registered against the firm in 2011, some
accounts frozen and its business shutdown.
Status:
The Economic Offences Wing (EOW) despite promising to file a watertight case
hasn’t yet filed a chargesheet within the case, even with the Bombay supreme
court rapping it for clubbing all the cheating cases together, resulting in a
delay. Speak Asia’s panelists have still not been refunded their money (Over Rs
2,000 Cr is due consistent with some media reports) and its key force are
absconding, with no convictions made till date.
HOME TRADE SCAM (2002)
Protagonists – Sanjay Agarwal, Sunil Kedar
Amount – Rs. 600 Cr
What was it about? –
A brokerage embezzling funds from over 25 corporate banks across Maharashtra by
luring them with higher interest rates on gilt trading. Investigations
revealed that the G-Secs which Home Trade claimed to have bought, were not
physically delivered and may not have even existed.
Status:
According to an India Today report Agarwal who was arrested in 2002 is out on
bail. The case has been indefinitely delayed thanks to the accused not
turning up for court hearings.
SARADHA CHIT FUND SCAM
(April 2013)
Protagonist – Sudipta Sen
Amount – Rs. 2060 – 2400 Cr
What was it about? –
One of the biggest Ponzi schemes in West Bengal that enjoyed political
patronage and lured millions of investors to deposit money with the promise of
abnormally high returns including fancy holidays etc. The chit fund
eventually collapsed resulting in defaults after a crackdown by SEBI and
therefore the Federal Reserve Bank of India. The default, aside from leaving
small depositors high and dry, also led to 10 media outlets owned by Saradha
being forced to finish up , leaving 1000 journalists jobless.
Status:
Various agencies including ED and SFIO are probing the misappropriation of
funds. Sudipto Sen, the Chairman and director of the Saradha Group was
arrested earlier this year and therefore the Enforcement Directorate has been
granted his custody for interrogation to probe concealment . Suspended TMC MP
Kunal Ghosh, who was accused by Sen for being involved within the scam has been
involved questioning by SFIO, but not arrested yet. The state had set up a
fund of Rs 500 crore for compensating poor depositors. Of Saradha’s 1.7
million investors, only 1000 depositors were indemnified in September and about
1 lakh were expected to be compensated before durga puja.
Changing role of SEBI as a watchdog
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 govt tried to form 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 gives these companies to corrupt the system? Are the provisions
that are weak or is it the regulations? Or maybe it’s the inordinate delay in
justice.
SEBI has extended control over the 23 stock exchanges of the country and
initiated several steps to make reform in the regulations of the capital market
so that investor’s may be protected against the fraud. Infect, SEBI sent strong
message to market participants that strict observance of regulations has been
essential to meet the extending needs of capital market as well as protect the
investor’s against the frauds. Moreover, the concept of corporate governance
(initiated by the SEBI on the basis of recommendations of various committees
such as Shri Kumar Mangalam Birla 2000, Naresh Chandra 2000 and Shri Naranyana
Murthy 2003) hinges on complete transparency, integrity and accountability of
management, which also includes the non-executive directors. The main aim of
corporate governance to handle corporate frauds and scandals, and a System of
making directors accountable to Shareholders for the effective management of
the company and also with adequate concern for ethics and value.
Evolution of Corporate Governance in India
The concept of excellent governance is extremely old in India dating back to
3rd century B.C. where Chanakya (Vazir of Parliputra) elaborated fourfold
duties of a king viz. Raksha, Vriddhi, Palana and Yogakshema. Substituting
the king of the State with the corporate CEO or Board of Directors the
principles of Corporate Governance refers to protecting shareholders wealth
(Raksha), enhancing the wealth by proper utilization of assets (Vriddhi),
maintenance of wealth through profitable ventures (Palana) and above all
safeguarding the interests of the shareholders (Yogakshema or
safeguard). Corporate Governance wasn’t in agenda of Indian Companies
until early 1990s and nobody would find much regard to this subject in book of
law till then. In India, weakness within the system like undesirable stock
exchange practices, boards of directors without adequate fiduciary
responsibilities, poor disclosure practices, lack of transparency and chronic
capitalism were all crying for reforms and improved governance. The fiscal
crisis of 1991 and resulting got to approach the IMF induced the govt to adopt
reformative actions for economic stabilization through liberalization. The
momentum gathered albeit slowly once the economy was pushed open and therefore
the liberalization process got initiated in early 1990s. As a part of
liberalization process, in 1999 the Government amended the Companies Act,
1956. Further amendments have followed subsequently in the year 2000, 2002
and 2003.The major corporate governance initiatives launched in India since the
mid 1990s.There are various reforms which were channelled through a number
of different paths with both the Security and Exchange Board of India (SEBI)and
the Ministry of Corporate Affairs, Government of India(MCA) playing important
roles.
Conclusion
After the good shock, corporate governance remains considered important by
shareholders and investors particularly during times of monetary trouble.
The OECD report on financial crisis in 2010 pointed out the weaknesses in
corporate governance that contributed to financial crisis. They run about the
lack of risk assessment and disclosure, high-risk exposure, lack of financial
experience among board members and remuneration still linked to short term
gains.
Board structure, composition and dealing practices have being associated with
good governance and avoidance of frauds. This report considers that these
characteristics can vary counting on complexity of business then they have to
be capable it.
Corporate governance is vital to control in shaping its legal and regulatory
frameworks, incorporating governance requirements. It is important to drive
shareholders and stakeholders in arising the proper questions on business. If
they need skills to try to to it, if they need to try to to it or are sensitive
to impression management that cloud their mind, this is often out of reach of
all these frameworks.
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