Genesis The landmark reforms dated back to the 1990s have established India as the fifth-largest economy by nominal GDP. Liberalisation and privatisation reforms have brought in vast chunks of foreign capital, thus accelerating the growth of the economy. These reforms have led to the listing of about 5245 companies on the BSE and over 1641 companies on NSE as of December 25, 2021. Though the establishment of these companies has accelerated the growth, these have also made the economy vulnerable to corporate scams. The accumulation of information and resources in a few hands has contributed to the information asymmetry among the agents of an economy, making the country susceptible to corporate schemes. Because of these considerations, a non-statutory regulatory body, SEBI, was constituted in 1988 to regulate the securities and the commodity market in India. The Securities and Exchange Board of India Committee on Corporate Governance defines corporate governance as the"Acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and their role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct, and about making a distinction between personal & corporate funds in the management of a company".

The SEBI has been constituted to resolve the principal-principal and the principal-agent conflict, which has been a significant issue in India since the 90s. This article aims to understand the need to enforce corporate governance through several cases with a particular reference to the Sahara Scam- arguably one of the most famous cases in India.

Corporate governance has been one of the most widely discussed issues related to business laws in India. Despite having a bunch of organisations for ensuring a uniform code of conduct for corporate governance, it turns out that all the private companies have not acceded to the rules and regulations of SBI, which has led to several corporate frauds and scams. Considering the several frauds and misuse of the laws, the laws have been made stringent over time, but the implementation of these laws has not been strict.

Evolution of the laws

The Companies Act,2013, replaced the old companies act, 1956, thus providing a formal structure for corporate governance by ensuring transparency, disclosures, and reporting. Also, the Foreign Exchange Management Act,1999), the Industries Development and Regulation) Act, 1951 has provided strength to the framework of corporate governance. The Ministry of Corporate Affairs (MCA) and the SEBI is the apex bodies monitoring corporate governance through Clause 49. A few non-regulatory bodies have also issued guidelines in these directions to strengthen corporate governance. For instance, the CII constituted a task force under the leadership of Mr. Naresh Chandra to recommend the Desirable Corporate Governance Code in 2009. The report of the Kumar Mangalam Birla Committee (2000) suggested the inclusion of Clause 49 in the Listing Agreement, which made the issue of corporate governance relevant for the listed companies.

Overview of the Problem  

Corporate frauds are not only illegal, but it dampens the economic growth and the reputation of the country. Despite these repercussions, corporate fraud has not been uncommon. The leading causes of corporate frauds are enlisted below:

• Non-availability of an independent auditing department
• A weak/ improper internal review mechanism to control fraudulent activities
• Ambiguous Memorandum of Association and non-adherence to MOA and AOA
• Delay in information dissipating mechanism / forged information shared with all stakeholders

Harshad S. Mehta vs Central Bureau Of Investigation:

Mehta, a member of the BSE, had built excellent connections with eminent personalities for investing and using the services provided by his form. Until the 90s, banks were not authorised to invest in the equity market, but they had to make profits and acquire a fraction of their assets in government interest bonds. Mehta exploited the legal procedure for is benefit and bought shares, thus producing an extraordinary demand for shares in the market. Share prices became sky-rocketing due to excessive demand. For instance, the value of a stock of ACC went up from Rs 200 to Rs 9000 in three months. Mehta produced fake bank receipts from The Bank of Karadand, the Mumbai Mercantile Bank, to befool other banks that the banks are lending against securities. The misuse of the banks' law led to a stock market crash, and he was arrested.

The incident exposed the loopholes in the then existing corporate governance laws. SEBI was vigilant enough to bring in stricter rules and regulations after this incident. The SEBI mandated all the companies to adhere to the Listing Agreement. The BSE introduced online, screen-based trading to ensure transparency in the stock market. Moreover, the badla system was introduced post the scam. However, later badla was banned. The Harshad Mehta scam raised concerns over the role of a regulator in the corporate world.

However, even after the stricter regulations implemented by the SEBI, the country witnessed numerous corporate fraud cases like the Saradha Scam, The C R Bhansali Case, and the Cobbler Case. These cases led to the introduction of several committees to suggest measures for efficient corporate governance. One such report was the Report of the Consultative Group of Directors of Banks, 2001. The directors of banks reviewed the role of banks to get feedback on the activities of the board related to audits and transparency. The report suggested making the Board of Directors more effective.

However, another big case that shook the entire country was the Sahara Scam. Sahara was a reputed company sponsoring the Indian cricket and hockey team and had the right image in the market. However, the scam tarnished the image of the company, and the company had to face severe legal consequences.

Sahara Scam - 2010:

Sahara Prime City submitted a 779-page DRHP to the SEBI for issuing Initial Public Offering (IPO) in 2009. During the analysis of DRHP, it was revealed that two of the companies- SIRECL (Sahara India Real Estate Corporation Ltd.) and SHICL (Sahara Housing Investment Corporation Ltd.) had raised funds illegally. The law mandates the approval of ROC for issuing Optionally Fully Convertible Debenture (OFCD) to 50 people and SEBI for issuing OFCD to more than 50 people. Preliminary investigations revealed that SIRECL and SHICL had issued OFCD to more than two crore investors. The Supreme Court found Sahara guilty and directed the company to return the money with 15% interest rates to SEBI within three months in 2012. The SC further gave additional powers to the SEBI by adding Sec 55A in the Companies Act to authorise SEBI in making decisions in matters of the issue, allotment, and transfer of securities. Additionally, the SEBI was authorised to administer the public companies and the companies that intend to be listed on the stock exchange in the country.

Sahara’s scam was a widely discussed topic throughout the country as it highlighted the loopholes of corporate governance in India. The government took the following reforms to post the Sahara scam:

• The SEBI was authorised to regulate any pool worth Rs 100 crore or more.
• The SEBI was empowered with the legitimacy to cease assets of people who fail to comply with the “seize and search” orders.
• SEBI reserves the right to retrieve telephonic records of the people suspected of violating security norms.
• Section 42 of the Companies Act, 2013, was amended to define "private placements." Section 42 defined private placements as issuing securities to 49 people at a maximum where individual invitations are sent to the investors for buying. If the number of investors exceeds 50, the issuing would be referred to as a public offer that has to be offered and verified by the SEBI.
• SEBI shall regulate chit funds, Nidhi schemes, and collective investment schemes that have a corpus higher than Rs 100 crores.

Indian Companies Amendment Act of 2015 introduces new provisions for corporate governance, incorporation, and management of subsidiaries.

Institutional Reforms

1. The Companies Act, 2013:

The Companies Act, 2013, replaced the old Companies Act 1956 to strengthen corporate governance. The significant changes in the Companies Act are listed below :

• The company must appoint one resident director.
• The public and the listed companies were mandated to appoint at least one women director.
• The new law explicitly mentioned the duties of the directors.
• The nominee director shall not be deemed as an independent director.
• All the listed companies must form the Audit Committee, Stakeholders' responsibility committee, CSR committee, and the Nomination and remuneration committee.
• Clause 166 - A company cannot have more than 15 directors.
• Clause 139 - An auditor cannot be appointed for more than one term of five years.
• Clause 245 - The order passed by the tribunal in case of disputes shall be legally binding to all the stakeholders.
• Clause 188 - A company is not entitled to enter into RPT contracts related to the sale and purchase of goods

2. Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (the Insider Trading Code):

The Prohibition of Insider Trading Regulations, 2015 replaced the 1992 code prohibiting insider trading. Under regulation 9, the board of directors is required to frame a code of conduct in adherence to the standards mentioned in Schedule B of the regulations prohibiting insider trading. Moreover, Section 195 of the Companies Act, 2013, prohibits insider trading of any form by any director or personnel of the company.

Considering the fact that the number of cases related to dampening of corporate governance despite several reforms after every case, the SEBI constituted the "Kotak committee (2017)” under the chairmanship of Mr. Uday Kotak, the managing director of Kotak Mahindra bank to suggest recommendations for a more stringent code of conduct for enhancing corporate governance standards. The committee submitted its report to the SEBI in June 2017, and the SEBI on March 28, 2018, decided to enforce a few recommendations without amendments and the other recommendations with slight amendments in the interests of the stakeholders. The recommendations accepted without any modifications are listed below :

• In order to ensure transparency, disclosure of skills of directors, audit fees, and the information about the competency of the auditor (including the reasons for the resignation of auditors, if any) were mandated with immediate effect.
• The SEBI reduced the maximum cap of listed entity directorships from 10 to 8 by April 1, 2019, and to 7 by April 1, 2020. In the endeavor of ensuring competent directors, the eligibility criteria of the director were made more stringent.
• The disclosure of quarterly reports was made compulsory from the FY 19-20
• Secretarial Audit to be obligatory for entities under SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations

Failures in the implementation of the reforms

Despite the reforms introduced by the SEBI and other competent institutes over the years, there has been a violation of the rules and regulations questioning the enforcement of these regulations over business giants.

Ricoh India case:

Ricoh India, a subsidiary of a Japanese company, had been profitable until the frauds reported in 2014. The largest shareholder of Ricoh India is a Japanese promoter who is the largest creditor as well. The company declared itself bankrupt before the NCLT. However, the minority stakeholders believe that the losses are not due to poor economic performance but are a result of the prevalent frauds in the company. The minority shareholders view the company's share as possessing a sea of potential for the investors. Although the Companies Act, 2013, and Listing Regulations have been enacted, the case is an example of accounting fraud and incorrect share prices. The case is similar to one of the most famous cases, the Satyam case, where a few managers exploited the independence of the auditors, and the stakeholders.

Relationship between corporate governance and CSR

The concept of sustainable development suggests a balance between economic development, social upliftment, and environmental protection. India being a welfare state has mandated the companies with a net worth of more than 5 billion rupees or an annual turnover of $140 million or companies with a profit of more than 50 million rupees to spend at least 2% of their net profits over three years for social welfare. India is the first state to mandate CSR through the Companies Act, 2013. Under the Companies Amendment Act, 2019, if a company is unable to spend money on CSR in a fiscal year, the stipulated CSR fund has to be transferred to a fund under the Schedule VII of the Companies Act, 2019. However, as many as 366 cases for not following the CSR rules and regulations were filed in the FY 2014-15.

Critical evaluation of the reforms

Over the years, all the regulatory bodies, judiciary, executive, and legislative bodies have framed laws to enforce good corporate governance in India. However, the rising number of cases related to corporate governance demarcates that there has not been a proper implementation of these laws. Out of the 2,693 entities listed on the BSE fulfilling the Clause 49 requirements, it was reported that more than 480 entities did not adhere to Clause 49 in June 2006. The problem with the dispute settlement is the low number of judges per million citizens. Canada has almost 75 judges per million citizens, whereas, in India, this figure is close to a mere 10. The low judge-population ratio has led up to the piling up of cases, thus delaying the settlement, and hence the deterrent is not strong enough in India for the violators. The ex-chief justice Dipak Mishra said, “There are more than 3.3 crore cases pending in India (till 2018). The lack of the number of judges and a cumbersome judiciary procedure are not the only reasons for the rampant increase in corporate fraud. The lack of coordination among the apex institutes like RBI, SEBI, and the MCA has led to ineffective implementation of the laws.

In the desire of an active grievance redressal forum, SEBI launched the SCORES app in 2011. Investors can lodge complaints against any listed entity on this forum and check the status of their complaints. As many as 3,50,000+ cases have been addressed through this mobile application. The ICAI has also laid out accounting standards for the companies to track discrepancies in the accounts. Moreover, Section 129 of the Companies Act, 2013, states that the disclosures should adhere to the accounting standards and should not be forged in any manner.

Road Ahead

One of the significant reasons for the lack of transparency is the unjust proportion of family persons on the board of members. The issue can be resolved by appointing women directors who have industry experience and are not related to the family in any manner. It would have a two-fold advantage:

1. decentralisation of power in board meetings, thus strengthening the voices of minor stakeholders other than the family business,
2. empowerment of women in society and a diverse set of perspectives arising in the board meetings.

The independent bodies like the ICAI and the SEBI should be empowered to deal with corporate failure so that the courts need not intervene in bringing justice. The issues of corporate failure are no more restricted to big business houses but have spread to the banking and insurance sector in recent times. Separate laws for the banking and insurance sector need to be framed, keeping their business dynamics into consideration. The provision of a hefty penalty in case of the Audit committee's failure must be made under Clause 49 of the SEBI. As of now, the lodging of any complaints pertaining to corporate failure is very cumbersome and confusing for ordinary citizens who can be potential whistleblowers for the benefit of the corporate world. Currently, there are different agencies for different kinds of complaints. For instance, the grievance related to FD with manufacturing companies and unlisted companies need to be brought under the notice of MCA, whereas the issues about insider trading and takeovers are handled by the SEBI. There should be a single complaint platform where ordinary citizens can raise their concerns, and their concerns are automatically re-routed to the concerned agencies.

The independent and the non-executive directors should be treated as autonomous authorities with access to information from the managers they deem fit. Independent directors should not have any share in the profit or stocks. There is an exhaustive set of laws detailing the rights and duties of the stakeholders and the board of directors. The risk management committee should hold meetings at regular intervals to address the vulnerabilities. A zero-tolerance policy for corruption and bribery should be ensured by the top management of the company, as all the laws without the management being ethical cannot be enforced. Hence, the leadership should develop a transparent and ethical code of conduct that will act as a precedence for all the stakeholders. The flow of information and financial records between the board and the management and the board should be made transparent and lucid. Hence, even though laws are necessary to establish a code of conduct, their adherence depends on the ethical and transparent nature of the leadership.

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