Corporate Governance in India : Post- Satyam the way ahead: What needs to be done ?

TITLE : Corporate Governance in India : Post –				development. [Vittal, N.]
Satyam the way ahead : What needs to be done?				Another reason, is that the
�				legal & administrative environment in India
� Abstract				provide excellent scope for corrupt practices in
				business. [Vittal, N.]
Corporate				According to Goswami,
governance has been a topic of hot debate in				(2000), the research on corporate governance has
developed countries like U.K. & U.S.A. for the				remained in its infancy in India because of opaque
last two decades. With the opening up of economies,				disclosure practices followed by Indian corporate
it has also been a concern for developing country like				sector.
India. This is because opening up of economies has				However it should be
changed the scenario of Indian market i.e. on one				noted that the corporate governance problems in
hand, it has made the world market accessible to the				India is different from that in U.S. or U.K. The
Indian corporates & on the other hand, it has				governance issue in U.S. or U.K. is that of disciplining
increased competition in the domestic market with				the management while the problem in the Indian
the advent of the multinational companies. In this				corporate sector is that of disciplining the dominant
changed scenario, the quality of governance has				shareholder & protecting the minority
been an important factor not only for survival of the				shareholders .[Varma, J. (1997)]
companies but also for influencing the company's
ability to raise money from capital market. Again				4.0 THE SATYAM FRAUD CASE :
corporate governance is important in Indian context				In one of the biggest frauds
because of the scams that occurred since				in India's corporate history, B. Ramalinga Raju,
liberalisation from 1991, for e.g. the UTI scam, Ketan				founder & CEO of Satyam Computers, India's
Parekh scam , Harshad Mehta scam, & the				fourth largest IT services firm announced on January
latest Satyam Fraud case.				7th, 2009 that his company has been falsifying
In this paper, we will look				accounts for years, overstating revenues &
into the historical background of corporate				inflating profits by $ 1 billion. The Satyam scam had
governance in India, recent developments in				been referred to as ‘India's Enron' by the
corporate governance in India till date, issues related				experts.
with respect to corporate governance in India . We				[
will also look into the latest & the biggest scam				The admission of
that had occurred with respect to corporate				committing fraud & resignation by Raju showed
governance i.e. The Satyam Fraud Case & will				that the company had been feeding investors,
try to suggest some solutions so that such frauds				shareholders, clients & employees a steady diet
does not occur in the near future.				of untruth with respect to its financial performance.
				Raju said in a letter addressed to the board, the
				stock exchanges & SEBI that Satyam's profit
Keywords : Corporate governance, Satyam Fraud				was inflated over several years to unmanageable
case.				proportions & that it was forced to carry more
				assets & resources than its real operations.
1.0 INTRODUCTION :				According to Raju, ‘It was like riding a tiger not
The term ‘Corporate				knowing how to get off without being eaten'
Governance' has become a buzzword worldwide.				[
According to Vittal, N., this is because of two				Raju's departure was
reasons. First is ,that after the collapse of Soviet				followed by resignation of the company's CFO &
Union & the end of cold war in 1990 the				appointment of an interim CEO. Meanwhile, a team of
concept of government controlling the commanding				auditors from SEBI began investigation into the fraud.
heights of the economy has gone, instead the				Also, since Satyam's stocks were registered on the
concept that market dynamics must prevail in the				New York Stock Exchange along with the Bombay
economic matters has been the conventional				Stock Exchange international regulators swung into
wisdom that is accepted worldwide. Second reason is				action. Two US law firms filed class- action law suits
the setting up of World Trade Organisation (WTO)				against Satyam. Satyam's share price fell to Rs.11.50
as a means of promoting globalisation. Globalisation				on January 2009 compared to a high of Rs. 554 in
involves the movement of four economic parameters				2008. In New York Stock Exchange also Satyam's
namely financial capital in terms of money invested in				shares were trading at $1.80 in March 2009 as
the capital markets, physical capital in terms of plant				compared to $29.10 in 2008.
& machinery, financial capital in terms of money				[
invested in the Foreign Direct Investment (FDI)				Satyam fraud case had
& labour moving across national borders.				laid bare the complete lack of accountability in the
According to Vittal, N., the pace of movement of the				company & prompted questions about
financial capital has grown because of the world				corporate governance practices of the company.
becoming a global village .				(A) ROLE OF THE BOARD:
2.0 CORPORATE GOVERNANCE IN INDIA : A				Among the many
BRIEF HISTORY [PRE- LIBERALIZATION i.e.				shortcomings of the Satyam episode, the most
PRE-1991] :				significant one has been the role of the independent
The historical development				directors who were supposed to safeguard the
of Indian corporate laws are marked with many				interest of all stakeholders. While the three
interesting contrasts. For example at independence,				committees had explicitly mentioned the role,
India inherited one of the world's poorest economies				independence, remuneration & responsibilities of
but it had a factory sector which accounted for a				independent directors the same did not translate into
tenth of the national product. India also had four				action but was only on paper.
functioning stock markets and a banking system				. [ ]
which had well-developed lending norms &				According to Andrew
recovery procedure.[ Goswami, O. (2002) ]				Holland , CEO, equities Ambit capital, independent
Corporate development in				directors should also be held accountable for board
India was marked by the managing agency system,				decisions & audit-related compliance practices.
which contributed to the birth of dispersed equity				[
ownership & also gave rise to the practice of				(B) ROLE OF THE AUDITORS :
management enjoying controlling rights				Although maximum focus
disproportionately greater than their stock ownership.				in the Satyam episode was on the role of the
[ Goswami, O. (2002) ]				independent directors, experts believe the role of the
The enactment of 1951				auditors in this case Pricewaterhouse Coopers should
Industries (Development & Regulation) Act				also be taken into account.
& the 1956 Industrial Policy Resolution marked				According to a fund
the beginning of a regime & culture of				manager, there should be a system similar to one
protection, licensing & red tape that encouraged				adopted in case of Public Sector Unit (PSU) banks
corruption & stilted the growth of the Indian				where auditors are changed every three years. [
corporate sector. Soon, corruption, nepotism &				A major reason for the
inefficiency became the hallmark of Indian corporate				fallout of the Satyam case was the issue related to
sector. [Chakrabarty, R., Megginson, W. &				the delay in implementation of Indian corporate laws.
Yadav, P. (2007)]				According to N.K. Jain , secretary & CEO of the
The corporate bankruptcy				Institute of Company Secretaries of India, the need
& reorganisation system was also not free from				of the hour is to enforce corporate laws in
problems. In this regard, we should consider the SICA				transparent, swift & uniform fashion.
or the Sick Industrial Companies Act 1985 & the				[
Board for Industrial & Financial Reconstruction				(C) MINORITY SHAREHOLDERS :
(BIFR) . According to SICA, a company is declared				According to experts,
‘sick' only when its entire net worth has been				institutional investors have the tools, bandwidth
eroded & it has been referred to BIFR. The				& clout to extract information & play an
BIFR usually took over 2 years on average just to				activist role in ensuring that management don't go off
reach a decision with respect to the companies. Only				track. If institutional investors act collectively they
a few companies emerged successfully from the				can demand the required change in the companies
BIFR & the legal process on average took more				they have invested.
than 10 years by which the assets of the company				[
were virtually worthless. Thus, protection of the				According to Anup Bagchi,
creditors' rights existed only in paper & the				executive director, Industrial Credit &
bankruptcy process was featured among the worst				Investment Corporation of India (ICICI) Securities,
in the World Bank survey on business climate. [				although independent directors play an important role
Goswami, O. (2002) ]				in ensuring better risk management, it is the demand
Again, although the				for good governance by institutional shareholders
Companies Act provided clear instruction for				which is the best driver towards higher governance
maintaining & updating share registers but in				standards.
reality minority shareholders often suffered from				[
irregularities in share transfers & registrations				(D) IMPACT ON BRAND INDIA :
.For example, there were cases where the rights of				The Satyam Fraud
the minority shareholders were compromised by the				Scam had raised concerns about the potential
management's private deals in case of corporate				damage to India's appeal to foreign investors &
takeovers. [Chakrabarty, R., Megginson, W. &				the IT services industry in particular.
Yadav, P. (2007) ]				According to Michael
Thus it can be concluded that				Useem, Wharton management Professor, one or two
for most of the pre-liberalization era the Indian equity				more accounting scandals similar to Satyam will make
markets were not sophisticated enough to exert				the foreign investors wary about investing in India.
effective control over the companies. Listing				[
requirements of exchanges provided some				On the other hand,
transparency but non-compliance was not rare &				corporate India had tried to control the damage. For
was also not punished.				example, Rajeev Chandrasekhar , president of the
2.1 RECENT DEVLOPMENTS IN CORPORATE				Federation of Indian Chambers of Commerce &
GOVERNANCE IN INDIA TILL DATE [POST-				Industry (FICCI), called upon regulators to move
LIBERALIZATION i.e. POST- 1991]:				quickly to demonstrate that the Satyam was an
Liberalization of the Indian				exceptional case among corporations &
economy began in 1991. Since then, there has been				investors need not worry about Indian corporate
major changes in both laws & regulations &				governance & accounting standards. [ ]
in the corporate governance landscape.				Even though, Raju
(a) The most important development in the				was widely blamed for unleashing India's Enron, a
field of corporate governance & investor				major difference between Enron & Satyam is
protection has been the establishment of the				that in Enron the CEO stonewalled, while
Securities & Exchange Board of India (SEBI) in				whistleblowers came out with the truth but in
1992. It has played a crucial role in establishing the				Satyam there were no whistle-blowers the CEO blew
basic minimum ground rules of corporate conduct in				the whistle on himself.
India. [Chakrabarty, R., Megginson, W. & Yadav,				[
P. (2007) ]
(b) The next significant event was the				5.0 RECOMMENDATIONS :
Confederation of Indian Industry (CII) Code for				1. SEBI should develop adequate
Desirable Corporate Governance developed by a				expertise for analysing financial statements so that it
committee chaired by Rahul Bajaj . The committee				is able to detect fraud in the financial statements in
was formed in1996 & it submitted it's				the future.
recommendation on April 1998. [Chakrabarty, R.,				2. The Institute of Chartered Accountants
Megginson, W. & Yadav, P. (2007)]				of India ( ICAI )or the Government should encourage
(c) Later two more committees were				the development of a whistle-blowing committee so
constituted by SEBI, one chaired by Kumar Mangalam				that anybody who finds anything doubtful or fishy
Birla & the other by Narayana Murthy. The Birla				about a company should report against the same
committee submitted its report on early 2000 &				immediately to the committee .
the second committee submitted its report on				3. SEBI should reconsider its financial
2003.The recommendation of these two committees				disclosure norms. A few years back SEBI suspended
had been instrumental in bringing major changes in				sending of printed copy of audited balance sheets to
the corporate governance through the formulation of				the shareholders as a cost cutting measure. In
Clause 49 of the Listing Agreement. [ Chakrabarty,				today's world , it can be done easily by uploading the
R., Megginson, W. & Yadav, P. (2007)]				same in the internet.
(d) Along with SEBI, the Department of Company				Also Bankers & Rating
Affairs & The Ministry of Finance , Government				Agencies can also then analyse the financial
of India, also took some initiatives for improving				statements for detecting fraud.
corporate governance in India. For example, the				4. The ICAI should implement a rule,
establishment of a study group to operationalize the				indicating that audit firms should be allowed to work
Birla Committee recommendations in 2000, the				as auditors of large companies for a period of two
Naresh Chandra Committee on Corporate Audit				years on a rotation basis in order to avoid undue
& Governance in 2002 & the Expert				influence committed by the audit forms.
Committee on Corporate Law (J.J. Irani Committee)				5. The SICA Act & BIFR should
in late 2004. [ Goswami, O. (2002) ]				be banned with immediate effect . In India, SICA has
(e) SEBI implemented the recommendations of				become so convenient for unscrupulous activities that
the Birla Committee through the enactment of Clause				industries become sick but not the owners. [Vittal, N.]
49 of the Listing agreement. Clause 49, can be				6. The entire banking system &
referred to as a milestone with respect to the				the Banking Secretary Act should be reviewed. In
changes in corporate governance in India. It is similar				India, if one borrows one lakh rupees one is afraid of
to Sarbanes - Oxley Act (SOX) in U.S. [Chakrabarty,				the bank while on the other hand if one had
R., Megginson, W. & Yadav, P. (2007)]				borrowed tweleve crore rupees the bank is afraid of
Clause 49 looks into the following matters :				the person. The Narasimham committee
(i) Composition of the board of				recommendation about putting some conditions at
the directors.				the time of issuing new loans addresses these
(ii) Composition &				problems to some extent. [Vittal, N.]
Functioning of the Audit Committee.				7. The Benami Transaction Prevention Act
(iii) Governance &				& The Prevention of Money Laundering Act,
disclosures regarding subsidiary				should be encouraged in order to prevent fraudulent
companies.				activities & also to ensure that corrupt practices
(iv) Disclosures by the				are effectively punished .[Vittal, N.]
company.
(v) CEO/CFO certification of				6.0 CONCLUSION :
the financial results.				Thus, in this
(vi) Reporting on corporate				paper we have tried to see the historical background
governance as part of the				of corporate governance in India, the developments
annual report.				in this field till date, the issues of corporate
(vii) Certification of compliance				governance in India, the Satyam Fraud case &
of a company with the				also provided recommendations so that similar fraud
provisions of				does not happen in the near future.
Clause 49.				Thus , it can
				be concluded that while corporate governance
(f) The National Foundation for Corporate				framework in the country is seen at par with the
Governance (NFCG) was formed by the Ministry of				developed countries the same has to be implemented
Corporate Affairs, Govt. of India, in partnership with				in letter as well as spirit.
Confederation of Indian Industry (CII), Institute of				[
Chartered Accountants of India (ICAI) &				Also,
Institute of Company Secretaries of India (ICSI) with				shareholders should ensure that the composition of
the goal of promoting better corporate governance				the board of directors is a balanced mix of
practices in India.[				independent directors & management
				appointees as this would help to keep a check on the
3.0 ISSUES IN CORPORATE GOVERNANCE IN				internal process of a company.[
INDIA:				Also, we
Corporate governance has been				should approach corporate governance issues in India
a topic of hot debate in developed countries like U.K.				not merely from the point of view of the Companies
& U.S.A. for the last two decades. With the				Act or the guidelines issued by Birla committee,
opening up of economies ,it has also been a concern				Murthy Committee, but look at the entire network of
for developing country like India. This is because,				various rules & regulations impinging on business
opening up of economies has changed the scenario				so that an integrated wholistic system is created to
of Indian market i.e. on one hand, it has made the				ensure that transparency & good corporate
world market accessible to the Indian corporates				governance prevail.
& on the other hand, it has increased
competition in the domestic market with the advent
of the multinational companies. In this changed				� 7.0 REFERENCES :
scenario, the quality of governance has been an
important factor not only for survival of the				1. Chakrabarty, R., Megginson, W. &
companies but also for influencing the company's				Yadav, P. (2007) , Corporate Governance in India ,
ability to raise money from capital market.				Centre for Financial Research – Working Paper
Corporate governance is				No. 08-02.
also important in Indian context because of the				2. Goswami, O. (2000), The tide rises,
scams that occurred since liberalisation from 1991,				gradually: Corporate Governance in India , paper
for e.g. the UTI scam, Ketan Parekh scam ,				presented at the OECD development centre.
Harshad Mehta scam & the latest & the				3. Goswami, O. (2002) Corporate Governance
biggest of them all the Satyam Fraud scam .				in India : Taking Action Against Corruption in Asia
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capital markets or the companies on which they have				in India : Disciplining the Dominant Shareholder , IIMB
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Another reason, is that it is				in India , Paper for publication in the 5th JRD Tata
believed that poor transparency & corporate				Memorial Lecture Series.
governance norms were one of the main reasons for				6.
the Asian crisis in 1997. And also because such crisis				7.
have huge impact on the economy which can set a				8.
country several years back in its path to

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Corporate Governance in India : Post- Satyam the way ahead: What needs to be done ?