Coursepack ESG 2020

CHRIST (Deemed to be University)
Institute of Management
Course Pack
MBA651F
Ethics and Corporate Governance
Batch 2018-20
January 2020
Course Anchor
Latha Ramesh Ph.D.
I. Primary Details of the Course
a. Syllabus
b. Course plan
c. Assessment Criteria
d. Guidelines on Group Assignment
II. Reading Materials

a. Governance through Inner consciousness
b. Resolving Ethical dilemmas
c. Corporate governance framework
d. Clause 49 Listing Agreement
e. Warren Buffet Letter to Shareholders -2017
III. Cases and Research Paper

a. Dragon soup and Earnings Management
b. Himachal Fertilizer Corporation (A): An Ethical Conundrum*
c. Tunnelling vs Agency Effect: A case study of Enron and Satyam
d. Research paper- Corporate Governance in the Indian context
e. Governance and Sustainability at Nike (B)*
f. Tata- The biggest boardroom Coup
*Will be handed over in hard copy

MBA651F Ethics And Corporate Governance 1 Credit
Course Description
Ethics are moral principles or values that govern the conduct of an individual or a group. This
course introduces finance students to the importance of Ethics at workplace and will also help
them develop the necessary skills in ethical decision-making. The topics will be applied to
realistic situations, particularly in financial services, investment banking and security
analysis.
Corporate governance is an academic discipline that brings together accounting, finance, law
and management. This course is developed to disseminate the evolving principles of good
corporate governance to the budding managers. This course give impetus, guidance and
direction to undertake research.
Course Objective
This course will help students understand the importance of Ethics and will also provide them
with a framework that can be used for the resolution of ethical dilemmas that they may face
during the course of their corporate careers.
The course will also help in understanding of the framework of good corporate governance,
corporate governance norms in the Indian context, national governance norms and the rights
of the various stakeholders.
At the end of the course, students should be able to:
Knowledge:
• Understand the Code of Ethics and Standards of Professional Conduct
• Understand Global Investment Performance Standards
• Understand the framework of corporate governance
• Analyse the purpose and limits of corporate governance
• Compare the responsibilities of different stakeholders in corporate governance
Skill:
• Develop the skill to take ethical decisions
• Develop the skill to report portfolio performance using Global Investment
Performance Standards
• Develop the research skills to analyze and evaluate empirical research in the area of
corporate governance
• Formulate inquisitive questions on the corporate governance issues and use
appropriate methods to conduct academic research
Attitude:
• Appreciate the importance of ethical practices and corporate sustainability
Unit I Ethical dilemmas in Corporate Finance (2 Hrs)
CFOs’ and ethics- Personal formation of ethics-Fundamental of financial control- Role of
Ethics and creative accounting- Conflict of interest on financial transactions- Earning
management practices- ethical issues in tax planning
Unit II Ethics and Investment Professionalism (2 Hrs)

Need for ethics in the investment industry- Obligations of investment professional with
clients, employees- code of conduct of investment professionals-consequences of conduct that
is unethical and unprofessional- framework for making ethical decisions
Unit III Conceptual Framework of Corporate Governance (2 Hrs)

Evolution, need and scope of corporate governance - Theories of corporate governance -
Agency theory - Stakeholder theory - Stewardship theory - Resource development theory -
Developments in corporate governance - Indian and global perspective - Elements of good
corporate governance- Board composition - Types of directors - role and responsibility of
directors - CEO duality - board charter- board meetings - Directors’ training and development
and performance evaluation - various board committees- audit committee, shareholders’
grievance committee, nomination committee.
Unit IV Legislative Framework of Corporate Governance and Risk Management (2 Hrs)

Corporate governance in Companies Act 2013 - SEBI Guidelines - Listing agreement,
(Enterprise risk management- Internal control- roles and responsibilities for internal control -
Disclosures on risk, risk management and internal control - whistle blower policies.
Unit V Corporate Governance and Stakeholder’s Right (2 Hrs)

Rights of shareholders- corporate governance issues with related party transactions- role of
institutional investors and investor associations on corporate governance- corporate
governance and other stakeholders, employees, customers’ lenders, vendors and society.
[Total 10 Hours]
Recommended Books
1. Fernando, A. (2012). Business Ethics and Corporate Governance (2 ed.). Noida:
Pearson.
2. Gramm, J. (2015). Dear Chairman: Boardroom Battles and the Rise of Shareholder
Activism. NewYork: Harper Business.
Essential Reading
1. CFA course material on Ethics
2. Indian Institute of Corporate Affairs (2016). Corporate Governance: New Delhi. Taxmann
Session-wise Course Plan
Module Details of the modules Pedagogy Reference/Assignment
Unit 1: Ethical dilemmas in Corporate Finance (3 Hours)
1 Governance through inner consiscousness- Discussion and Course pack Reading

features of ethics- Theory of ethics- case analysis
Analysing the ethical dilemmas- Caselets- Resolving
Whistleblower policies- SOX act ethical dilemma of the
Investment manager
2 Ethical dilemma on Corporate finance Case Analysis Caselets – (1) The

scenario Analysis headquarters Building
(2) The curious loan

approval
Unit 2: Ethical dilemmas in Investment Profession (3 Hours)
3 Ethics and Earnings management- Case Analysis Case- Dragon soup and
Adjustments to purchases vs lease- Earnings Management
Production vs pricing- Accounts receivable
– treatment of investments
4 Board of management- Ethical Conundrum Case Analysis Case – Himachal

Fertilisers*
Unit 3: Conceptual Framework of Corporate Governance (3 Hours)
Theories of corporate governance- Discussion Course pack Reading

Conceptual framework- Various committee
5 and their role
6 Agency Vs Tunneling Case Analysis Case study -Tunnelling vs

Agency Effect: A case
study of Enron and
Satyam
Unit 4: Legislative Framework of Corporate governance (1.5 Hours)
7 Clause 49 of the disclosures - Corporate Discussion Refer the Course pack

governance practices of India & Clause 49
Review of the Research paper :
research paper Corporate governance in
Indian context
Unit 5: Corporate Governance and Stakeholders Right (4.5 Hours)
8 Corporate Governance and sustainability Case Analysis Case: Governance and

Sustainability at Nike *
9 The board and the shareholders- The need Discussion Warren Buffet letter to
for communication Shareholder- Extract from
the Annual report 2017
10 The conflict between Board and Promoters Case Analysis Case: Tata- the biggest
– Consequences board room coup
* Will be handed over in hard copies
Recommended Books
1. Fernando, A. (2012). Business Ethics and Corporate Governance (2 ed.). Noida:

Pearson.
2. Gramm, J. (2015). Dear Chairman: Boardroom Battles and the Rise of Shareholder
Activism. NewYork: Harper Business.
Assessment Pattern
Components of the Assessment Marks Weightage
CIA 1 MCQ quiz every two weeks covering the concepts 10 20%
CIA 2 Group Assignment – Corporate governance Framework 20 40%

Analysis of Domestic and International Company
CIA 3 Closed Book Test - Case Analysis 15 40%
Attendance As per the rubrics given by the instructor 5 10%

and Class
participation
TOTAL MARKS 50 100%

ANALYSIS OF THE CORPORATE GOVERNANCE PRACTICE
Comparison between the company listed India and a Select Country
Assignment Description
This group assignment involves the analysis of the Corporate Governance (CG hereinafter)
practices of any Indian listed company and comparison of its practices with any other
company listed abroad. Here the students would do the critical evaluation in the context of
the corporate governance framework of the respective countries.
Learning Objectives
1. Understand the corporate governance framework and compliance requirement of Indian
listed companies
2. Compare the Corporate governance norms of India with a select country
3. Evaluate the corporate governance practices of the select company
4. Critically analyse the Corporate governance structure
Details of the Assignment

a) Group of three as assigned by the instructor will pick up any country to study the corporate
governance framework along with India and also select an Indian listed company and a
company listed in the select country
b) Analyse CG norms of the respective countries as prescribed by the regulators (Clause 49
of the listing agreement and Listing and Disclosure Requirement (LODR) of SEBI in India
and the counterpart of the select company
c) Apprise the CG disclosure of both the companies in the last few years and evaluate if the
companies have adhered to the corporate governance structure of the respective companies
( for example, the board size, composition, various committee, CEO duality etc)
d) Critically analyse the CG practices of the Indian company by looking into the disclosure in
the last few years (the number of years as suggested by the respective instructor) and
evaluate the improvement or otherwise over the years (e.g., the number of meetings, the
expertise of the board, the diversity of the board etc.,)
e) Suggest any improvement the company can do over its disclosures .
Format of the Assignment
As advised by the respective instructor
Rubrics
Parameters/ 5 4 3 2 1
Scale
Analysis of Exceptionally Well- Content is Content is Content is not
the CG well presented presented and sound and sound and sound
Framework and argued; argued; ideas solid; ideas solid; but
ideas are are detailed, are present ideas are not
detailed, well- developed but not present but or
developed, and supported particularly supported;
supported with evidence developed or
with specific and details supported;
evidence &
facts, as well
as examples
and specific
detail
Comparison Demonstrates Demonstrates Demonstrates Demonstrates Demonstrates
of the an extremely a a deep level some depth of minimal
corporate deep level of considerably of understanding depth of
governance understanding deep level of understanding of the CG understanding
framework of the CG understanding of the CG framework of of the CG
framework of of the CG framework of both the framework of
both the framework of both the countries both the
countries both the countries countries
countries
Analysis and NA Evaluation of Evaluation of Evaluation of Evaluation of
critical CG practices CG practices CG practices CG practices
evaluation is centeed is centeed is centeed is not centeed
of the CG around CG around CG around CG around CG
disclosures norms and norms and norms and norms and
proide solid proide proide weak proide weak
evidences somewhat evidences evidences
solid
evidences
Suggestions NA Suggestions Suggestions Suggestion is
Corporate are very are clear and missing or
Disclosure clear, reflects useful incomplete
the
understanding
of best
disclosure
norms
Format and NA Clear Clear Unclear
Organization organisation organisation , organisation
of the report and Coherent incoherent and writing;
writing and writing; format not as
format as per format as per per guidelines
guideline guidelines
49. Corporate Governance
The company agrees to comply with the following provisions:
I. Board of Directors
(A) Composition of Board

i. The Board of directors of the company shall have an optimum combination of
executive and non-executive directors with not less than fifty percent of the board of
directors comprising of non-executive directors.
ii. Where the Chairman of the Board is a non-executive director, at least one-third of
the Board should comprise of independent directors and in case he is an executive
director, at least half of the Board should comprise of independent directors.
Provided that where the non-executive Chairman is a promoter of the company or is
related to any promoter or person occupying management positions at the Board
level or at one level below the Board, at least one-half of the Board of the company
shall consist of independent directors.
Explanation-For the purpose of the expression “related to any promoter” referred to

in sub-clause (ii):
a. If the promoter is a listed entity, its directors other than the independent directors,
its employees or its nominees shall be deemed to be related to it;
b. If the promoter is an unlisted entity, its directors, its employees or its nominees
shall be deemed to be related to it.”
iii. For the purpose of the sub-clause (ii), the expression ‘independent director’ shall
mean a non-executive director of the company who:
a. apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
directors, its senior management or its holding company, its subsidiaries and
associates which may affect independence of the director;
b. is not related to promoters or persons occupying management positions at the
board level or at one level below the board;
c. has not been an executive of the company in the immediately preceding three
financial years;
d. is not a partner or an executive or was not partner or an executive during the
preceding three years, of any of the following:
i. the statutory audit firm or the internal audit firm that is associated with the
company, and
ii. the legal firm(s) and consulting firm(s) that have a material association with
the company.
e. is not a material supplier, service provider or customer or a lessor or lessee of the
company, which may affect independence of the director;
f. is not a substantial shareholder of the company i.e. owning two percent or more of
the block of voting shares.
g. is not less than 21 years of age
Clause 49- Corporate Governance

Explanation
For the purposes of the sub-clause (iii):
a. Associate shall mean a company which is an “associate” as defined in Accounting
Standard (AS) 23, “Accounting for Investments in Associates in Consolidated
Financial Statements”, issued by the Institute of Chartered Accountants of India.
b. “Senior management” shall mean personnel of the company who are members of
its core management team excluding Board of Directors. Normally, this would
comprise all members of management one level below the executive directors,
including all functional heads.
c. “Relative” shall mean “relative” as defined in section 2(41) and section 6 read
with Schedule IA of the Companies Act, 1956.
d. Nominee directors appointed by an institution which has invested in or lent to the
company shall be deemed to be independent directors.
Explanation:
“Institution’ for this purpose means a public financial institution as defined in Section
4A of the Companies Act, 1956 or a “corresponding new bank” as defined in section
2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
[both Acts].”
(B) Non executive directors’ compensation and disclosures
All fees/compensation, if any paid to non-executive directors, including independent

directors, shall be fixed by the Board of Directors and shall require previous approval of
shareholders in general meeting. The shareholders’ resolution shall specify the limits for the
maximum number of stock options that can be granted to non-executive directors, including
independent directors, in any financial year and in aggregate.
Provided that the requirement of obtaining prior approval of shareholders in general meeting
shall not apply to payment of sitting fees to non-executive directors, if made within the limits
prescribed under the Companies Act, 1956 for payment of sitting fees without approval of the
Central Government.
(C) Other provisions as to Board and Committees
i. The board shall meet at least four times a year, with a maximum time gap of four
months between any two meetings. The minimum information to be made available
to the board is given in Annexure– I A.
ii. A director shall not be a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director.
Furthermore it should be a mandatory annual requirement for every director to
inform the company about the committee positions he occupies in other companies
and notify changes as and when they take place.
Explanation:

1. For the purpose of considering the limit of the committees on which a director can
serve, all public limited companies, whether listed or not, shall be included and all
other companies including private limited companies, foreign companies and
companies under Section 25 of the Companies Act shall be excluded.
2. For the purpose of reckoning the limit under this sub-clause,
Chairmanship/membership of the Audit Committee and the Shareholders’
Grievance Committee alone shall be considered.
iii. The Board shall periodically review compliance reports of all laws applicable to the
company, prepared by the company as well as steps taken by the company to rectify
instances of non-compliances.
iv. An independent director who resigns or is removed from the Board of the Company
shall be replaced by a new independent director within a period of not more than
180 days from the day of such resignation or removal, as the case may be:
Provided that where the company fulfils the requirement of independent directors in
its Board even without filling the vacancy created by such resignation or removal,
as the case may be, the requirement of replacement by a new independent director
within the period of 180 days shall not apply
(D) Code of Conduct
i. The Board shall lay down a code of conduct for all Board members and senior management
of the company. The code of conduct shall be posted on the website of the company.
ii. All Board members and senior management personnel shall affirm compliance with the
code on an annual basis. The Annual Report of the company shall contain a declaration to
this effect signed by the CEO.
Explanation: For this purpose, the term “senior management” shall mean personnel of the
company who are members of its core management team excluding Board of Directors.
Normally, this would comprise all members of management one level below the executive
directors, including all functional heads.
II. Audit Committee
(A) Qualified and Independent Audit Committee
A qualified and independent audit committee shall be set up, giving the terms of reference
subject to the following:
i. The audit committee shall have minimum three directors as members. Two-thirds of the
members of audit committee shall be independent directors.
ii. All members of audit committee shall be financially literate and at least one member
shall have accounting or related financial management expertise.

Explanation 1: The term “financially literate” means the ability to read and understand
basic financial statements i.e. balance sheet, profit and loss account, and statement of
cash flows.
Explanation 2: A member will be considered to have accounting or related financial

management expertise if he or she possesses experience in finance or accounting, or
requisite professional certification in accounting, or any other comparable experience or
background which results in the individual’s financial sophistication, including being or
having been a chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities.
iii. The Chairman of the Audit Committee shall be an independent director;
iv. The Chairman of the Audit Committee shall be present at Annual General Meeting to
answer shareholder queries;
v. The audit committee may invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the
committee, but on occasions it may also meet without the presence of any executives of
the company. The finance director, head of internal audit and a representative of the
statutory auditor may be present as invitees for the meetings of the audit committee;
vi. The Company Secretary shall act as the secretary to the committee.
(B) Meeting of Audit Committee
The audit committee should meet at least four times in a year and not more than four months
shall elapse between two meetings. The quorum shall be either two members or one third of
the members of the audit committee whichever is greater, but there should be a minimum of
two independent members present.
(C) Powers of Audit Committee
The audit committee shall have powers, which should include the following:
1. To investigate any activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
4. To secure attendance of outsiders with relevant expertise, if it considers necessary.
(D) Role of Audit Committee
The role of the audit committee shall include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.
2. Recommending to the Board, the appointment, re-appointment and, if required, the
replacement or removal of the statutory auditor and the fixation of audit fees.

3. Approval of payment to statutory auditors for any other services rendered by the
statutory auditors.
4. Reviewing, with the management, the annual financial statements before submission to
the board for approval, with particular reference to:
a. Matters required to be included in the Director’s Responsibility Statement to be
included in the Board’s report in terms of clause (2AA) of section 217 of the
Companies Act, 1956
b. Changes, if any, in accounting policies and practices and reasons for the same
c. Major accounting entries involving estimates based on the exercise of judgment by
management
d. Significant adjustments made in the financial statements arising out of audit
findings
e. Compliance with listing and other legal requirements relating to financial
statements
f. Disclosure of any related party transactions
g. Qualifications in the draft audit report.
5. Reviewing, with the management, the quarterly financial statements before submission
to the board for approval
5A. Reviewing, with the management, the statement of uses / application of funds raised
through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds
utilized for purposes other than those stated in the offer document/prospectus/notice and the
report submitted by the monitoring agency monitoring the utilisation of proceeds of a
public or rights issue, and making appropriate recommendations to the Board to take up
steps in this matter.
6. Reviewing, with the management, performance of statutory and internal auditors,
adequacy of the internal control systems.
7. Reviewing the adequacy of internal audit function, if any, including the structure of the
internal audit department, staffing and seniority of the official heading the department,
reporting structure coverage and frequency of internal audit.
8. Discussion with internal auditors any significant findings and follow up there on.
9. Reviewing the findings of any internal investigations by the internal auditors into
matters where there is suspected fraud or irregularity or a failure of internal control
systems of a material nature and reporting the matter to the board.
10. Discussion with statutory auditors before the audit commences, about the nature and
scope of audit as well as post-audit discussion to ascertain any area of concern.
11. To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
12. To review the functioning of the Whistle Blower mechanism, in case the same is
existing.
12A. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other
person heading the finance function or discharging that function) after assessing the
qualifications, experience & background, etc. of the candidate.
13. Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.

Explanation (i): The term "related party transactions" shall have the same meaning as
contained in the Accounting Standard 18, Related Party Transactions, issued by The
Institute of Chartered Accountants of India.
Explanation (ii): If the company has set up an audit committee pursuant to provision of
the Companies Act, the said audit committee shall have such additional functions /
features as is contained in this clause.
(E) Review of information by Audit Committee
The Audit Committee shall mandatorily review the following information:

1. Management discussion and analysis of financial condition and results of operations;
2. Statement of significant related party transactions (as defined by the audit committee),
submitted by management;
3. Management letters / letters of internal control weaknesses issued by the statutory
auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal auditor shall
be subject to review by the Audit Committee
III. Subsidiary Companies
i. At least one independent director on the Board of Directors of the holding company shall be
a director on the Board of Directors of a material non listed Indian subsidiary company.
ii. The Audit Committee of the listed holding company shall also review the financial
statements, in particular, the investments made by the unlisted subsidiary company.
iii. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at
the Board meeting of the listed holding company. The management should periodically
bring to the attention of the Board of Directors of the listed holding company, a statement
of all significant transactions and arrangements entered into by the unlisted subsidiary
company.
Explanation 1: The term “material non-listed Indian subsidiary” shall mean an unlisted
subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free
reserves) exceeds 20% of the consolidated turnover or net worth respectively, of the listed
holding company and its subsidiaries in the immediately preceding accounting year.
Explanation 2: The term “significant transaction or arrangement” shall mean any individual
transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or
total expenses or total assets or total liabilities, as the case may be, of the material unlisted
subsidiary for the immediately preceding accounting year.
Explanation 3: Where a listed holding company has a listed subsidiary which is itself a
holding company, the above provisions shall apply to the listed subsidiary insofar as its
subsidiaries are concerned.
IV. Disclosures

(A) Basis of related party transactions
i. A statement in summary form of transactions with related parties in the ordinary

course of business shall be placed periodically before the audit committee.
ii. Details of material individual transactions with related parties which are not in the
normal course of business shall be placed before the audit committee.
iii. Details of material individual transactions with related parties or others, which are
not on an arm’s length basis should be placed before the audit committee, together
with Management’s justification for the same..
(B) Disclosure of Accounting Treatment
Where in the preparation of financial statements, a treatment different from that

prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the
financial statements, together with the management’s explanation as to why it believes
such alternative treatment is more representative of the true and fair view of the
underlying business transaction in the Corporate Governance Report.
(C) Board Disclosures – Risk management
The company shall lay down procedures to inform Board members about the risk
assessment and minimization procedures. These procedures shall be periodically
reviewed to ensure that executive management controls risk through means of a properly
defined framework.
(D) Proceeds from public issues, rights issues, preferential issues etc.
When money is raised through an issue (public issues, rights issues, preferential issues
etc.), it shall disclose to the Audit Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc), on a quarterly
basis as a part of their quarterly declaration of financial results. Further, on an annual
basis, the company shall prepare a statement of funds utilized for purposes other than
those stated in the offer document/prospectus/notice and place it before the audit
committee. Such disclosure shall be made only till such time that the full money raised
through the issue has been fully spent. This statement shall be certified by the statutory
auditors of the company. Furthermore, where the company has appointed a monitoring
agency to monitor the utilisation of proceeds of a public or rights issue, it shall place
before the Audit Committee the monitoring report of such agency, upon receipt, without
any delay. The audit committee shall make appropriate recommendations to the Board to
take up steps in this matter.
(E) Remuneration of Directors
i. All pecuniary relationship or transactions of the non-executive directors vis-à-vis

the company shall be disclosed in the Annual Report.

ii. Further the following disclosures on the remuneration of directors shall be made in
the section on the corporate governance of the Annual Report:
a. All elements of remuneration package of individual directors summarized under
major groups, such as salary, benefits, bonuses, stock options, pension etc.
b. Details of fixed component and performance linked incentives, along with the
performance criteria.
c. Service contracts, notice period, severance fees.
d. Stock option details, if any – and whether issued at a discount as well as the
period over which accrued and over which exercisable.
iii. The company shall publish its criteria of making payments to non-executive
directors in its annual report. Alternatively, this may be put up on the company’s
website and reference drawn thereto in the annual report.
iv. The company shall disclose the number of shares and convertible instruments held
by non-executive directors in the annual report.
v. Non-executive directors shall be required to disclose their shareholding (both own
or held by / for other persons on a beneficial basis) in the listed company in which
they are proposed to be appointed as directors, prior to their appointment. These
details should be disclosed in the notice to the general meeting called for
appointment of such director
(F) Management
i. As part of the directors’ report or as an addition thereto, a Management Discussion

and Analysis report should form part of the Annual Report to the shareholders. This
Management Discussion & Analysis should include discussion on the following
matters within the limits set by the company’s competitive position:
1. Industry structure and developments.
2. Opportunities and Threats.
3. Segment–wise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational performance.
8. Material developments in Human Resources / Industrial Relations front,
including number of people employed.
ii. Senior management shall make disclosures to the board relating to all material
financial and commercial transactions, where they have personal interest, that may
have a potential conflict with the interest of the company at large (for e.g. dealing in
company shares, commercial dealings with bodies, which have shareholding of
management and their relatives etc.)
Explanation: For this purpose, the term "senior management" shall mean personnel
of the company who are members of its. core management team excluding the
Board of Directors). This would also include all members of management one level
below the executive directors including all functional heads.
(G) Shareholders

i. In case of the appointment of a new director or re-appointment of a director the
shareholders must be provided with the following information:
a. A brief resume of the director;
b. Nature of his expertise in specific functional areas;
c. Names of companies in which the person also holds the directorship and the
membership of Committees of the Board; and
d. Shareholding of non-executive directors as stated in Clause 49 (IV) (E) (v)
above
ia. Disclosure of relationships between directors inter-se shall be made in the Annual
Report, notice of appointment of a director, prospectus and letter of offer for
issuances and any related filings made to the stock exchanges where the company is
listed.
ii. Quarterly results and presentations made by the company to analysts shall be put on
company’s web-site, or shall be sent in such a form so as to enable the stock
exchange on which the company is listed to put it on its own web-site.
iii. A board committee under the chairmanship of a non-executive director shall be
formed to specifically look into the redressal of shareholder and investors
complaints like transfer of shares, non-receipt of balance sheet, non-receipt of
declared dividends etc. This Committee shall be designated as
‘Shareholders/Investors Grievance Committee’.
iv. To expedite the process of share transfers, the Board of the company shall delegate
the power of share transfer to an officer or a committee or to the registrar and share
transfer agents. The delegated authority shall attend to share transfer formalities at
least once in a fortnight.
V. CEO/CFO certification
The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act,
1956 and the CFO i.e. the whole-time Finance Director or any other person heading the
finance function discharging that function shall certify to the Board that:
a. They have reviewed financial statements and the cash flow statement for the year and
that to the best of their knowledge and belief :
i. these statements do not contain any materially untrue statement or omit any material
fact or contain statements that might be misleading;
ii. these statements together present a true and fair view of the company’s affairs and
are in compliance with existing accounting standards, applicable laws and
regulations.
b. There are, to the best of their knowledge and belief, no transactions entered into by the
company during the year which are fraudulent, illegal or violative of the company’s code
of conduct.
c. They accept responsibility for establishing and maintaining internal controls for financial
reporting and that they have evaluated the effectiveness of internal control systems of the
company pertaining to financial reporting and they have disclosed to the auditors and the
Audit Committee, deficiencies in the design or operation of such internal controls, if any,
of which they are aware and the steps they have taken or propose to take to rectify these
deficiencies.

d. They have indicated to the auditors and the Audit committee
i. significant changes in internal control over financial reporting during the year;
ii. significant changes in accounting policies during the year and that the same have been
disclosed in the notes to the financial statements; and
iii. instances of significant fraud of which they have become aware and the involvement
therein, if any, of the management or an employee having a significant role in the
company’s internal control system over financial reporting.
VI. Report on Corporate Governance
i. There shall be a separate section on Corporate Governance in the Annual Reports of

company, with a detailed compliance report on Corporate Governance. Non-
compliance of any mandatory requirement of this clause with reasons thereof and
the extent to which the non-mandatory requirements have been adopted should be
specifically highlighted. The suggested list of items to be included in this report is
given in Annexure- I C and list of non-mandatory requirements is given in
Annexure – I D.
ii. The companies shall submit a quarterly compliance report to the stock exchanges
within 15 days from the close of quarter as per the format given in Annexure I B.
The report shall be signed either by the Compliance Officer or the Chief Executive
Officer of the company
VII. Compliance
1. The company shall obtain a certificate from either the auditors or practicing company
secretaries regarding compliance of conditions of corporate governance as stipulated in
this clause and annex the certificate with the directors’ report, which is sent annually to
all the shareholders of the company. The same certificate shall also be sent to the Stock
Exchanges along with the annual report filed by the company.
2. The non-mandatory requirements given in Annexure – I D may be implemented as per
the discretion of the company. However, the disclosures of the compliance with
mandatory requirements and adoption (and compliance) / non-adoption of the non-
mandatory requirements shall be made in the section on corporate governance of the
Annual Report.
Annexure I A
Information to be placed before Board of Directors
1. Annual operating plans and budgets and any updates.

2. Capital budgets and any updates.
3. Quarterly results for the company and its operating divisions or business segments.
4. Minutes of meetings of audit committee and other committees of the board.
5. The information on recruitment and remuneration of senior officers just below the board
level, including appointment or removal of Chief Financial Officer and the Company
Secretary.

6. Show cause, demand, prosecution notices and penalty notices which are materially
important
7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution
problems.
8. Any material default in financial obligations to and by the company, or substantial
nonpayment for goods sold by the company.
9. Any issue, which involves possible public or product liability claims of substantial nature,
including any judgement or order which, may have passed strictures on the conduct of the
company or taken an adverse view regarding another enterprise that can have negative
implications on the company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or
intellectual property.
12. Significant labour problems and their proposed solutions. Any significant development in
Human Resources/ Industrial Relations front like signing of wage agreement,
implementation of Voluntary Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course
of business.
14. Quarterly details of foreign exchange exposures and the steps taken by management to
limit the risks of adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory or listing requirements and shareholders
service such as non-payment of dividend, delay in share transfer etc.
Annexure I B
Format of Quarterly Compliance Report on Corporate Governance
Name of the Company:

Quarter ending on:
Particulars Clause of Compliance Remarks
Listing Status
agreement Yes/No
I. Board of Directors 491
(A) Composition of Board 49 (IA)
(B) Non-executive Directors’ 49 (IB)
compensation & disclosures
(C) Other provisions as to Board and 49 (IC)
Committees
(D) Code of Conduct 49 (ID)
II. Audit Committee 49 (II)
(A) Qualified & Independent Audit 49 (IIA)
Committee
(B) Meeting of Audit Committee 49 (IIB)
(C) Powers of Audit Committee 49 (IIC)
(D) Role of Audit Committee 49 II(D)
(E) Review of Information by Audit 49 (IIE)
Committee

Particulars Clause of Compliance Remarks
Listing Status
agreement Yes/No
III. Subsidiary Companies 49 (III)
IV. Disclosures 49 (IV)
(A) Basis of related party transactions 49 (IV A)
(B) Disclosure of Accounting Treatment 49 (IV B)
(C) Board Disclosures 49 (IV C)
(D) Proceeds from public issues, rights 49 (IV D)
issues, preferential issues etc.
(E) Remuneration of Directors 49 (IV E)
(F) Management 49 (IV F)
(G) Shareholders 49 (IV G)
V. CEO/CFO Certification 49 (V)
VI. Report on Corporate Governance 49 (VI)
VII. Compliance 49 (VII)
Note:
1. The details under each head shall be provided to incorporate all the information required
as per the provisions of the Clause 49 of the Listing Agreement.
2. In the column No.3, compliance or non-compliance may be indicated by Yes/No/N.A..
For example, if the Board has been composed in accordance with the Clause 49 I of the
Listing Agreement, "Yes" may be indicated. Similarly, in case the company has no
related party transactions, the words “N.A.” may be indicated against 49 (IV A)
3. In the remarks column, reasons for non-compliance may be indicated, for example, in
case of requirement related to circulation of information to the shareholders, which would
be done only in the AGM/EGM, it might be indicated in the "Remarks" column as – “will
be complied with at the AGM”. Similarly, in respect of matters which can be complied
with only where the situation arises, for example, "Report on Corporate Governance" is to
be a part of Annual Report only, the words "will be complied in the next Annual Report"
may be indicated.
Annexure I C
Suggested List of Items to Be Included In the Report on Corporate Governance in the
Annual Report of Companies
1. A brief statement on company’s philosophy on code of governance.
2. Board of Directors:
a. Composition and category of directors, for example, promoter, executive,

nonexecutive, independent non-executive, nominee director, which institution
represented as lender or as equity investor.
b. Attendance of each director at the Board meetings and the last AGM.
c. Number of other Boards or Board Committees in which he/she is a member or
Chairperson.
d. Number of Board meetings held, dates on which held.

3. Audit Committee:
i. Brief description of terms of reference

ii. Composition, name of members and Chairperson
iii. Meetings and attendance during the year
4. Remuneration Committee:
i. Brief description of terms of reference

ii. Composition, name of members and Chairperson
iii. Attendance during the year
iv. Remuneration policy
v. Details of remuneration to all the directors, as per format in main report.
5. Shareholders Committee:
i. Name of non-executive director heading the committee

ii. Name and designation of compliance officer
iii. Number of shareholders’ complaints received so far
iv. Number not solved to the satisfaction of shareholders
v. Number of pending complaints
6. General Body meetings:
i. Location and time, where last three AGMs held.

ii. Whether any special resolutions passed in the previous 3 AGMs
iii. Whether any special resolution passed last year through postal ballot – details of
voting pattern
iv. Person who conducted the postal ballot exercise
v. Whether any special resolution is proposed to be conducted through postal ballot
vi. Procedure for postal ballot
7. Disclosures:
i. Disclosures on materially significant related party transactions that may have potential
conflict with the interests of company at large.
ii. Details of non-compliance by the company, penalties, strictures imposed on the
company by Stock Exchange or SEBI or any statutory authority, on any matter related
to capital markets, during the last three years.
iii. Whistle Blower policy and affirmation that no personnel has been denied access to the
audit committee.
iv. Details of compliance with mandatory requirements and adoption of the
nonmandatory requirements of this clause
8. Means of communication.
i. Quarterly results

ii. Newspapers wherein results normally published
iii. Any website, where displayed
iv. Whether it also displays official news releases; and
v. The presentations made to institutional investors or to the analysts.
9. General Shareholder information:
i. AGM : Date, time and venue

ii. Financial year
iii. Date of Book closure
iv. Dividend Payment Date
v. Listing on Stock Exchanges
vi. Stock Code
vii. Market Price Data : High., Low during each month in last financial year
viii. Performance in comparison to broad-based indices such as BSE Sensex, CRISIL
index etc.
ix. Registrar and Transfer Agents
x. Share Transfer System
xi. Distribution of shareholding
xii. Dematerialization of shares and liquidity
xiii. Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date
and likely impact on equity
xiv. Plant Locations
xv. Address for correspondence
Annexure I D
Non-Mandatory Requirements
1. The Board
The Board - A non-executive Chairman may be entitled to maintain a Chairman's

office at the company's expense and also allowed reimbursement of expenses
incurred in performance of his duties. Independent Directors may have a tenure
not exceeding, in the aggregate, a period of nine years, on the Board of a
company. The company may ensure that the person who is being appointed as an
independent director has the requisite qualifications and experience which would
be of use to the company and which, in the opinion of the company, would enable
him to contribute effectively to the company in his capacity as an independent
director."
2. Remuneration Committee
i. The board may set up a remuneration committee to determine on their behalf

and on behalf of the shareholders with agreed terms of reference, the
company’s policy on specific remuneration packages for executive directors
including pension rights and any compensation payment.
ii. To avoid conflicts of interest, the remuneration committee, which would
determine the remuneration packages of the executive directors may comprise

of at least three directors, all of whom should be non-executive directors, the
Chairman of committee being an independent director.
iii. All the members of the remuneration committee could be present at the
meeting.
iv. The Chairman of the remuneration committee could be present at the Annual
General Meeting, to answer the shareholder queries. However, it would be up to
the Chairman to decide who should answer the queries.
3. Shareholder Rights
A half-yearly declaration of financial performance including summary of the

significant events in last six-months, may be sent to each household of
shareholders.
4. Audit qualifications
Company may move towards a regime of unqualified financial statements.
5. Training of Board Members
A company may train its Board members in the business model of the
company as well as the risk profile of the business parameters of the company,
their responsibilities as directors, and the best ways to discharge them.
6. Mechanism for evaluating non-executive Board Members
The performance evaluation of non-executive directors could be done by a

peer group comprising the entire Board of Directors, excluding the director
being evaluated; and Peer Group evaluation could be the mechanism to
determine whether to extend / continue the terms of appointment of non-
executive directors.
7. Whistle Blower Policy
The company may establish a mechanism for employees to report to the

management concerns about unethical behaviour, actual or suspected fraud or
violation of the company’s code of conduct or ethics policy. This mechanism
could also provide for adequate safeguards against victimization of employees
who avail of the mechanism and also provide for direct access to the Chairman
of the Audit committee in exceptional cases. Once established, the existence
of the mechanism may be appropriately communicated within the
organization.

5-211-251(A)
CRAIG J. CHAPMAN
Dragon Soup and Earnings Management (A)

Jason Phillips departed a meeting with his company’s chief executive officer (CEO)
somewhat in shock. Phillips had recently joined Dragon Soup, a private company that
manufactured a line of canned soups colored red, green, and even purply-blue based loosely on an
idea from a British television cartoon called The Clangers. Phillips had not expected to hear from
his boss that the company was preparing for another round of fund-raising early the following
year.
As Dragon Soup’s chief financial officer (CFO), Phillips had been given the task of
maximizing the value of the firm at the time of the fund-raising. Although he did not want to
break any laws or violate any accounting standards, Phillips needed to investigate what
accounting choices or changes in the firm’s operations could enhance the company’s financial
position and increase its perceived value to investors.
Background
In their meeting, Rebecca Dunwoody, Dragon Soup’s CEO, had been adamant that investors
were not always careful when analyzing financial statements; she said she thought they generally
just assumed a multiple of earnings for the valuation. This frustrated her because she saw Dragon
as a growth story for which current costs represented investments to build brand loyalty and
future business. Dunwoody believed this growth was not reflected in most other soup companies’
valuation multiples, which typically ran in the region of fifteen times sustainable earnings for
large public companies (ten times for private ones), in addition to the value of cash and
marketable investments on the balance sheet.
Dunwoody had stressed repeatedly during her discussion with Phillips the importance of
boosting the company’s stock price. This emphasis did not surprise Phillips; Dunwoody had
founded the company almost ten years before, and with more than 70 percent of the shares, she
remained its largest shareholder and had the most to gain from the sale of shares at a high price.
Based on previous discussions, Phillips had assumed Dunwoody wanted to push for a public
offering of shares, which might provide her a way to sell part of her holdings while retaining a
minority interest. In contrast, today’s discussion revealed that Dunwoody might now consider an
outright sale of the company or settle for a private offering to a small group of investors if the
company could issue a smaller number of shares at the right price, and if she could retain
effective control.
Because almost twelve months remained before the planned offering or sale, Phillips
wondered whether this was just a way for Dunwoody to test whether he was up to the task of
©2011 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Craig J. Chapman.
Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data,
or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call
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without the permission of the Kellogg School of Management.
DRAGON SOUP AND EARNINGS MANAGEMENT (A) 5-211-251(A)
being CFO. After all, his predecessor had left suddenly, and Phillips had been recruited
surprisingly quickly as a replacement; he doubted that Dunwoody fully appreciated his abilities.
Such thoughts would have to wait, however. Phillips opened the spreadsheet he had been
working on earlier in the day, which contained Dragon’s base case financial projections as shown
in Exhibit 1A, Exhibit 1B, and Exhibit 1C. Dunwoody had been clear—she would implement
any action Phillips recommended as long as it boosted the stock price at the time of the fund-
raising. The question for Phillips was how aggressive he should be and what the consequential
accounting disclosures might be. One useful feature of the spreadsheet was that it provided
suggested footnote disclosures depending on the business and accounting choices that were input.
As he considered his options, Phillips reminded himself that the U.S. Securities and
Exchange Commission (SEC) recognized that a company’s management had a unique perspective
on its business that only it could present. That being the case, the SEC’s specific requirements for
the management discussion and analysis (MD&A) section of a company’s statutory filings went
beyond those required by auditors. The SEC’s MD&A requirements were intended to satisfy
three principal objectives:
 to provide a narrative explanation of a company’s financial statements that enabled

investors to see the company through the eyes of management;
 to enhance the overall financial disclosure and provide the context within which financial
information should be analyzed; and
 to provide information about the quality—and potential variability—of a company’s
earnings and cash flow, so that investors could ascertain the likelihood that past
performance might be indicative of future performance.1
Given the possibility of a future public offering of shares, Phillips also wanted to be able to
provide certification of the financial statements in compliance with the Securities and Exchange
Act of 1934 (the Securities Act), as shown in Exhibit 2. Phillips considered it critical, therefore,
that all disclosures complied with the SEC guidelines and the requirements of the Securities Act.
Phillips had several options to consider before his next meeting with Dunwoody.
A New Canning Machine

The operations department had decided it needed to acquire a new canning machine almost
immediately to replace the existing one, which was unreliable and had been in use since the
establishment of the company almost a decade ago. The machine’s reliability was crucial to
successful production, so there was no question about its being acquired. The only remaining
questions were whether it should be purchased or leased and, if leased, whether it should be set
up as a capital or an operating lease.
1
More information about the SEC requirements can be found in Financial Reporting Release 36, which states that a company’s
MD&A should “give investors an opportunity to look at the registrant through the eyes of management by providing a historical and
prospective analysis of the registrant’s financial condition and results of operations, with a particular emphasis on the registrant’s
prospects for the future.”
2 KELLOGG SCHOOL OF MANAGEMENT

5-211-251(A) DRAGON SOUP AND EARNINGS MANAGEMENT (A)
If purchased, the machine, which had an estimated useful life of twenty years, would cost $1
million. Phillips was confident the company could borrow the entire amount, repayable with a
mortgage-style repayment profile2 over eighteen years at an interest rate of 5 percent per annum.
Almost identical terms could be obtained if Dragon chose to lease the asset over a term of
eighteen years with annual payments of $85,550, and Dragon would have the option to purchase
the machine for $1 at the end of the lease. Dragon also had the option to lease the machine for
fourteen years at a rate of $85,870 per annum, with no purchase option. In all three scenarios,
payments would be made at the end of each calendar year.
Product Pricing, Production, and Promotion

Phillips had spoken with the members of the sales team about pricing. They were confident
they could sell some of the soup at almost any price, given the cult following of The Clangers,
but they pressed him to keep prices low to maintain volume. Trials at a variety of dollar-
denominated prices indicated that annual demand for Dragon’s soup was approximately 25
million * e-1.5*price cans. Phillips had doubts, however, about this formula because it had been
produced using linear regression techniques. The formula suggested that the current sales price of
$1.83 per can (resulting in an annual demand for some 1.6 million cans) might not be optimal.
Phillips knew production costs rose with volume. Even with the new machine, he estimated
the cost of raw materials would be about $1 per can, with additional costs of (250,000 + x2*10-7 +
2x3*10-16) dollars for x cans of soup this year to cover labor and other production costs across the
volume ranges Dragon expected to produce.3
In addition to setting a regular price for the year, the company occasionally ran special-price
and aisle-display promotions in conjunction with retailers. By offering additional inventory to
retailers at 15 percent below regular prices for two weeks, Dragon could boost sales volumes by
35 percent over the period of the promotion. Unfortunately for Dragon, such increased sales
usually did not result in an equal increase in soup purchases by the end-consumer.
In fact, retail sales volumes at regular prices in the first week following the promotion
typically dropped by 30 percent, as shown in the chart on the left in Figure 1. Overall, as shown
in the chart on the right in Figure 1, this resulted in a cumulative contribution that, through the
end of the promotion, was 20 percent higher than a regular week’s contribution; it then decreased
rapidly in the period following the promotion.
2
A mortgage-style repayment profile has equal annual payments of principal and interest.
3
These amounts exclude any depreciation or other charges associated with the machine, which are added to the purchase cost of
inventory and expensed when the inventory was sold.
KELLOGG SCHOOL OF MANAGEMENT 3

Figure 1: The Effect on Sales Volumes (left) and Contribution (right) of a Two-Week
Promotion in Weeks 5 and 6, with Competitors Maintaining Stable Prices
In general, Phillips estimated, these promotions actually cost the company almost 10 percent
of a regular week’s contribution. Careful timing of a promotion of this type just before the end of
the year, however, might add a little to this year’s income.
Being mindful once again of the SEC rules, Phillips checked online and found that SEC staff
had asked that “shipments of product at the end of a reporting period that significantly reduce
customer backlog and that reasonably might be expected to result in lower shipments and revenue
in the next period” should be disclosed and discussed in the MD&A.4 Given that Dragon could
run promotions at any time and, presumably, could repeat the promotion at the end of the
following period, Phillips was not sure whether a promotion of this type required specific
discussion or disclosure in the financial statements. The good news was that a quick glance
through the financial statements of other companies in the soup business revealed no evidence of
other companies making such references in their MD&A discussions.
Given the initial inventory of 240,000 cans—valued on the balance sheet at $0.75 per can
using the last-in first-out (LIFO) method—Phillips needed to decide on a pricing strategy, as well
as on production volumes. In prior years, production had been scheduled to leave about 15
percent of annual sales volume in inventory at the year-end. As far as he could tell, however, this
number was not fixed. In fact, most competitors operated with inventory levels of approximately
12 percent of annual sales. Phillips therefore was confident that end-of-year inventory could be
reduced to 14 percent of sales without affecting customer service levels, but he also wondered if
increasing inventory levels might be way to increase the company’s stock price. In accordance
with U.S. generally accepted accounting principles (GAAP) for manufacturing companies and the
direct use of plant, property, and equipment (PP&E) in the manufacturing process, all
depreciation expenses were added to the purchase cost of inventory and expensed when the
inventory was sold.
Uncertain Accounts Receivables

The original reason Phillips had scheduled the meeting with Dunwoody was to discuss the
status of a significant customer account. Since joining the company, Phillips had noticed that
4
U.S. Securities and Exchange Commission, “Codification of Staff Accounting Bulletins: Topic 13, Revenue Recognition,”
http://sec.gov/interps/account/sabcodet13.htm (accesed April 28, 2006).

distributor J. N. & C., one of Dragon Soup’s largest customers (responsible for some 20 percent
of Dragon’s sales) had been delaying payments. Phillips had heard rumors that J. N. & C. was
potentially in financial difficulty and that these amounts ultimately might not be recoverable if the
distributor was pushed into bankruptcy by its lenders.
The accounts receivable from J. N. & C had been growing at approximately $100,000 per
year, to just under $450,000, representing about nine months of Dragon’s sales to the distributor.
Dunwoody had not blinked when Phillips had shared that figure with her; she replied that she
knew well the family who owned the majority of J. N. & C.’s shares and that they would be good
for the money. In fact, the two businesses had grown alongside each other. During the meeting,
Dunwoody had even offered to guarantee the payments from her substantial personal wealth if
Phillips thought it might help increase the perceived value of the company to investors. Although
such a transaction would need appropriate internal approvals because of its related-party nature,
the presence of such a guarantee certainly would reduce the prospect of an awkward provision for
bad debts, which the auditors likely would require without it. Phillips’s first instinct was that this
would be positive, even if the related-party nature of the transaction would need to be disclosed.
Upon further analysis of the existing provisions for uncollectible accounts, Phillips could
identify, in the accounts at the end of the previous year, almost $300,000 of unused provisions
(i.e., amounts that previously had been taken as an expense through the income statement but that
had not yet been written off). Of these provisions, $150,000 related to receivables from J. N. &
C., which would no longer be required, given the proposed guarantee from Dunwoody.
Furthermore, recent improvement in the economic environment and better-than-expected recent
collections meant that total write-offs for the year were projected to be only $75,000. As a result,
Phillips thought it likely the overall provision remaining at the end of the year could be reduced
to $100,000, in addition to any amounts due from J. N. & C. that had not been guaranteed by
Dunwoody.
Investments in Shares and Mortgage-Backed Securities

Having considered the accounts receivable, Phillips directed his attention further down the
asset side of the balance sheet. Two items caught his attention: investments in shares and
mortgage-backed securities that were held by the firm (detailed in Figure 2). Phillips wondered if
anything here might be helpful.
Figure 2: Summary of Existing Investments (Available for Sale)

Original Purchase Price Current Market Value Management Estimate of
($) ($) Value ($)
Shares 100,000 125,000 125,000
Mortgage-backed securities 120,000 60,000 90,000
When originally purchased, the investments in shares and mortgage-backed securities all had
been designated as “available for sale” securities; the fair value of the assets was reported on the
balance sheet. Unrealized gains and losses, however, were reported under “other comprehensive
income” on the balance sheet, affecting the income statement only if the investment were sold.
Although the investments made in shares had increased in value since they were purchased,
Phillips was concerned that since Dragon had made the original investment, prices quoted for the

mortgage-backed securities had declined by almost 50 percent. That was, if he could find a buyer;
the bid-ask spread had widened dramatically, and almost no trades were being made.
Accounting standards in the United States generally required a fair value measurement to
assume a value that would be received if the asset were sold in an orderly transaction at the
measurement date. During the recent financial crisis, however, the Financial Accounting
Standards Board (FASB) had provided some clarification regarding the term “orderly.” The
accounting rules now included an exception if an asset experienced a significant decrease in the
volume and level of activity. In such cases, FASB acknowledged, transactions or quoted prices
might not determine fair value; a significant adjustment to the quoted prices might be necessary
to estimate fair value. Using a present value technique, Phillips estimated the true value of the
mortgage-backed securities to be around 75 percent of their original value. He wondered whether
he could persuade the auditors of this valuation and whether potential investors would understand
his actions—even if the asset would appear as a Level III Fair Value estimate in the end-of-year
accounts.5
Prior Investment in a Tomato Farm

Phillips was running out of time; he had promised Dunwoody he would have his initial
proposals ready before their next meeting. Dunwoody had asked about another issue, however.
Just before the end of the previous year, Dragon had acquired one of its suppliers—a tomato
farm—for $1 million in cash and an estimated $1 million in deferred consideration (to be paid at
the end of the year if the farm met certain production targets). The price paid represented the fair-
market value of the acquired assets (mostly land). Given the contingent payment and the need to
ensure production, the previous owner had agreed to continue working on the farm for no
additional payment this year and had said he would share 25 percent of the contingent payment
with his workers, provided they stayed with him for the full year.
To finance the deferred consideration payment, Dunwoody had suggested she really did not
want to invest additional equity in Dragon and so Phillips should plan to borrow up to $500,000
from the company’s bank. This made sense to Phillips, as Dunwoody drew only a nominal salary
from the company; her compensation was paid through dividend distributions. Historically, the
dividend had been determined to leave the company with a cash balance equal to 3 percent of
annual sales.
Phillips thought he understood the original accounting for the acquisition but hoped
Dunwoody’s interest in the structure might bode well for him in terms of a future retention bonus.
5
In accordance with Financial Accounting Standard 157, Codification Topic number 820, Fair Values are categorized as Level 1, 2, or
3, depending on how they are derived. “The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active
markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs
used to measure fair value might fall in different levels of the fair-value hierarchy. The level in the fair value hierarchy within which
the complete measurement falls is determined by the lowest level of input significant to the fair-value measurement in its entirety.”

Exhibit 1A: Base Case Forecast Income Statement for the Next Twelve Months
(in accordance with U.S. Generally Accepted Accounting Principles)
U.S. $
Revenue
Product sales 2,939,360
Expenses
Cost of goods sold (2,439,844)
Selling, general, and administrative (240,620)
Operating income 258,896
Interest expense (50,000)

Income before provision for 208,896
income taxes
Provision for income taxes (75,081)
Net income (loss) 133,815
Exhibit 1B: Base Case Forecast Cash Flow Statement for the Next Twelve Months (in
accordance with U.S. Generally Accepted Accounting Principles)
U.S. $
Net income 133,815
+ Depreciation expense 325,000
+ Decrease in other current assets 4,525
+ Increase in current liabilities 1
– Increase in deferred tax asset (1,967)
Cash flow from operating activities 461,374
Spend on PP&E/Deferred payment (2,000,000)

Cash flow from investing activities (2,000,000)
Increase in loan liability 1,464,454

Investment by shareholders 78,095
Cash flow from investing activities 1,542,549
Net cash flow 3,923

Exhibit 1C: Base Case Historical and Forecast Balance Sheet (in accordance with U.S.
Generally Accepted Accounting Principles)
U.S. $ End of Last Year End of This Year
Assets
Cash 84,258 88,181
Available for sale securities 185,000 185,000
Accounts receivable (net) 535,024 529,085
Inventory 180,000 181,414
Total current assets 984,282 983,680
Deferred tax asset 104,340 106,307

PP&E at historical cost 7,500,000 8,500,000
Less accumulated depreciation (2,750,000) (3,075,000)
Net PP&E 4,750,000 5,425,000
Total assets 5,838,622 6,514,987
Liabilities
Accounts payable 260,908 260,909
Deferred consideration for acquisition 1,000,000 0
Long-term debt 0 1,464,454
Total liabilities 1,260,908 1,725,343
a
Shareholders’ equity 4,577,714 4,789,624
Total liabilities and shareholders’ equity 5,838,622 6,514,967
a
Shareholders’ equity is reduced by $35,000 of accumulated other comprehensive income
Exhibit 2: Sample Certification Language to be Executed by the CEO and the

CFO
Certification Pursuant to Securities and Exchange Act of 1934, Rule 13a-14 As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to
the period covered by this report.
Based on my knowledge, the financial statements, and other financial information

included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of Dragon Soup as of, and for, the periods presented
in this report.
Exhibit 3: Assumptions and Statements

See accompanying Excel file for spreadsheets containing assumptions and statements, as well
as notes to the accountants.

RESEARCH Tunneling vs Agency Effect: A
includes research articles that
focus on the analysis and Case Study of Enron and Satyam
resolution of managerial and
academic issues based on
analytical and empirical or case Srinivas Shirur
research
Executive This is a comparative study of Enron and Satyam corporate frauds. An attempt has
been made to arrive at some generalizations about the key reasons for the differences
Summary between agency and tunneling problems. Agency effect and tunneling phenomena
focus on the divergence in the interests of managers, promoters, and minority share-
holders, which are the key reasons for corporate fraud. There is a clear difference
between the fraud committed due to tunneling and agency effect. The article high-
lights this feature through the case study of Enron and Satyam. The difference between
tunneling and agency effect has important implications for corporate finance. Corpo-
rate finance is based on the assumptions of separation of ownership and management
and also perpectual continuity of corporation. If these two assumptions are dropped,
then many of the widely accepted theories may not hold.
The article concludes that the legal framework, nature of financial system, and level of
economic development are the key factors which determine the level of agency effect
and tunneling problem. Solutions to corporate governance problems are quite differ-
ent in India as compared to the US or Europe. Hence, it would be inappropriate to copy
American legislations like Sarbanes Oxley Act in India. Effective prevention of de-
structive self-dealing activities is necessary for development of vibrant capital market,
whereby small investors will be confident to invest in the Indian market, since they
will perceive risk premium to be low.
The key policy prescriptions are as follows:
• Effective delivery of justice is as important as enacting investor-friendly laws.

• Creation of subsidiary companies by the parent company and large financial trans-
actions with banks should be viewed with suspicion. On the part of the sharehold-
ers, they should be suspicious of any self-dealing transactions. Since the time of
Harshad Mehta, when stock brokers, promoters of the company, and bankers con-
nived to cheat small investors, enforcement agencies view even large banking trans-
actions with suspicion.
KEY WORDS • Small investors and institutional investors should play a proactive role to seek
information and reject any decisions which reduce their value of shares. Proactive
Self-dealing Problem participation of outside shareholders in the corporate affairs of the company, espe-
Enron cially in the selection of board of directors and approval of resolutions, are the key
remedies to prevent such cases.
Satyam • There should be an effective control of black money.
• Certain clues like promoters setting up too many subsidiaries, frequent changes
Bankruptcy
and resignations in board of directors, consistent decrease in promoter stake or
Unsystematic Risk increasing liquidation of equity options, are clear signs of fraud taking place. Regu-
latory authorities should work on such clues and operate in such a way that there
Common Law Countries is least chance of regulatory arbitrage.
VIKALPA • VOLUME 36 • NO 3 • JULY - SEPTEMBER 2011 9

T
here is an urgent need to distinguish between com- cases in the past, such as the CRB case, involving Bhansali,
panies controlled by managers and those con- MS Shoes, Mescos, Golden Forests, and Home Trade;
trolled by promoters. Many academicians con- Harshad Mehta case in 1998, which involved promoters
sider agency cost and tunneling as two sides of the same of several old economy companies like Apollo Tyres, BPL,
coin with the same impact on shareholders. The present Videocon, Sterlite, etc; and Ketan Parekh case in 2002
study tries to clarify this misconception. Agency cost is mainly involving new economy stocks and service sector
prevalent in companies controlled by managers. In con- companies like Aftek, Infosys, HFCL, Global Trust Bank,
trast, tunneling is a problem faced by promoter-driven DSQ Software, etc. Similarly, no two agency cost prob-
companies. Understanding the key difference between the lems are the same. In the US, many companies, like Enron,
two concepts is central to the future analysis of various Arthur Anderson, World com, Tyco, Adelphia, Global
topics in corporate finance. This analysis is done with Crossing, etc., have faced crisis in the past due to agency
the help of a comparative case study of Enron and Satyam. problem, while others like Lehman Brothers, Merrill
Both the financial scams took place in the first decade of Lynch, American Express, Citibank, Morgan Stanley, AIG
the 21st century and will have wider implications than and Goldman Sachs, etc., have suffered corporate failure
has been understood till now. due to the recent sub-prime crisis.
According to La Porta, et al (1998), India and the US be- An attempt will be made to compare the Enron and Satyam
long to the common law countries which have fairly good cases and arrive at some generalization about the key
disclosure norms and investor protection laws. Still, com- reasons for the differences between them.
panies are widely held in the US while they are concen-
trated in India. Ignoring the division between civil law ENRON
countries and common law countries for a moment, one In 1999, Enron was rated as the most innovative large
can find a better distinction in shareholding pattern be- company in the US in Fortune magazine’s survey of the
tween developed and developing countries. The question Most Admired Companies. Yet within a year, Enron’s
is not only about the shareholder rights but also the qual- image was in tatters and its stock price had plummeted
ity of enforcement of these rights. Investor protection has nearly to zero. Table 1 lists some of the critical events for
a wider scope than shareholder rights. To what extent Enron between August 1985 and December 2001 — a saga
the shareholder rights are converted into investor protec- of document shredding, restatements of earnings, regula-
tion also depends on the quality of law enforcement agen- tory investigations, a failed merger, and the company fil-
cies. ing for bankruptcy.
In the present article, tunneling and agency cost are de-

Reasons for the Failure of Enron
fined in the following manner:
Unsystematic Risk
Tunneling is defined as the transfer of assets and profits
out of firms for the benefit of their controlling sharehold- In the early 1980s, most contracts between natural gas
ers. producers and pipelines were “take-or-pay” contracts,
where pipelines agreed either to purchase a predeter-
Agency costs are defined as the loss of controlling agency mined quantity at a given price or be liable to pay the
behaviour for shareholders through measures taken by equivalent amount in case of failure to honour that con-
the shareholders themselves and the managers as well as tract. In these contracts, prices were typically fixed over
the costs from any agency behaviour that has not been the contract life or increased with inflation. Pipelines, in
controlled. There are three components of agency costs, turn, had similar long-term contracts with local gas dis-
viz., monitoring expenditures, bonding expenditures, and tribution companies or electric utilities to purchase gas
residual loss (Jensen and Meckling, 1976). The present from them. These contracts assured long-term stability in
article will deal with the cost from any agency behaviour supply and prices of natural gas.
that has not been controlled, i.e., residual loss.
However, changes in the regulation of the natural gas
No two tunneling cases are the same. Each has a unique market during the mid-1980s, which deregulated prices
background. In India, there have been many tunneling and permitted more flexible arrangements between pro-
10 TUNNELING VS AGENCY EFFECT: A CASE STUDY OF ENRON AND SATYAM

Table 1: Enron Timeline
1985: Houston Natural Gas merges with Omaha, to create the company that would eventually be named Enron Corp. The deal
integrated several pipeline systems to create the first nationwide natural gas pipeline system.
1987: Enron discovers that oil traders in New York have over extended the company’s accounts by almost $1 billion. The
company ultimately works this loss down to $142 million. This leads to Enron developing a myriad of services to help
reduce the risk of price swings for everything from gas to advertising space.
1988: Enron opens its first overseas office in England to take advantage of the country’s privatization of its power industry. The
company’s major strategy shift – to pursue unregulated markets in addition to its regulated pipeline business – is revealed
to executives in a gathering that became known as the “Come to Jesus” meeting.
1989: Jeffrey Skilling joins the company and Enron launches its Gas Bank, a programme under which buyers of natural gas can
lock in long-term supplies at fixed prices. The company also begins to offer financing for oil and gas producers.
1992: Enron acquires Transportadora de Gas del Sur, Enron’s first pipeline presence in South America and the start of a push to
expand on the continent.
1993: Enron’s Teesside power plant in England begins operation, one of the first big successes for the company’s international
strategy.
1994: Enron makes its first electricity trade, beginning what will turn out to be one of the company’s biggest profit centres in the
next few years.
1995: Enron Europe establishes a trading centre in London, marking the company’s entry into European wholesale markets.
Europe is now considered one of the company’s prime growth markets.
1996: Construction begins on the first phase of the Dabhol power plant in India. The $2 billion project would be plagued with
political problems throughout its construction. Enron puts its stake in the project up for sale in 2001.
1997: To expand its electricity business, Enron buys Portland General Electric Corp., the utility serving the Portland, Ore., area.
In 2001, Enron agrees to sell Portland General Electric to Northwest Natural Gas Co. for about $1.9 billion. Enron Energy
Services is formed to provide energy management services to commercial and industrial customers.
1998: Enron acquires Wessex Water in the United Kingdom, which forms the basis for its water subsidiary Azurix.
1999: Enron forms its broadband services unit. The first phase of the Dabhol project begins operations. One-third of Azurix is
sold to the public in an initial public offering. After an early rise, shares fall sharply as the year goes on and the problems
facing the company become apparent. Enron Online, the company’s commodity trading Internet site, is formed. It
quickly becomes the largest e-business site in the world. Enron Energy Services turns its first profit in the fourth quarter.
2000: Rebecca Mark resigns from her position as Azurix Chairperson.
Annual revenues reach $100 billion, more than double the year before, reflecting the growing importance of trading.
Enron Field is opened in downtown Houston. In addition to buying the naming rights, Enron Chairman Ken Lay helped
raise financial support for the construction project.
The Energy Financial Group ranks Enron the sixth-largest energy company in the world, based on market capitalization.
Enron and strategic investors, IBM and America Online, launch The New Power Co. to provide electric service in a
deregulated market.
2001
August 14, 2001 – Jeffrey Skilling resigned as CEO, citing personal reasons. He was replaced by Kenneth Lay.
Mid- to late August – Sherron Watkins, an Enron Vice President, wrote an anonymous letter to Kenneth Lay expressing
concerns about the firm’s accounting. She subsequently discussed her concerns with James Hecker, a former colleague
and audit partner at Andersen, who contacted the Enron audit team.
October 12, 2001 – An Arthur Andersen lawyer contacted a senior partner in Houston to remind him that the company policy
was not to retain documents that were no longer needed, prompting the shredding of documents.
October 16, 2001 – Enron announces quarterly earnings of $393 million and nonrecurring charges of $1.01 billion after tax to
reflect asset write-downs primarily for water and broadband businesses.
October 22, 2001 – The Securities and Exchange Commission opened inquiries into a potential conflict of interest between
Enron, its directors and its special partnerships.
November 8, 2001 – Enron restated its financials for the prior four years to consolidate partnership arrangements retroactively.
Earnings from 1997 to 2000 declined by $591 million, and debt for 2000 increased by $658 million.
November 9, 2001 – Enron entered merger agreement with Dynegy.
November 28, 2001 – Major credit rating agencies downgraded Enron’s debt to junk bond status, making the firm liable to retire
$4 billion of its $13 billion debt. Dynegy pulled out of the proposed merger.
December 2, 2001 – Enron led for bankruptcy in New York and simultaneously sued Dynegy for breach of contract.

ducers and pipelines, led to an increased use of spot mar- was being deregulated. This exposed the company to eco-
ket transactions. nomic risk.
In an attempt to achieve further growth, Enron pursued a Political Risk

diversification strategy. It began by reaching beyond its
International diversification, particularly in developing
pipeline business to become involved in natural gas trad-
economies such as India and China, exposed Enron to
ing. It extended the natural gas model to become a finan-
political risks. For example, the Dabhol power project in
cial trader and market maker in electric power, coal, steel,
India represented the single largest foreign direct invest-
paper and pulp, water, and broadband fibre optic cable
ment project until that time in India, and it attracted con-
capacity. It undertook international projects involving
siderable political opposition and controversy. Given its
construction and management of energy facilities. By
limited business experience in developing economies,
2001, Enron had become a conglomerate that owned and
Enron did not have expertise in managing the political
operated gas pipelines, electricity plants, pulp and paper
risk of expropriation of its assets after the construction of
plants, broadband assets and water plants internation-
the plant.
ally and traded extensively in financial markets for the
same products and services. SATYAM
Enron entered into long-term fixed price arrangements Satyam won the Golden Peacock Award for the best gov-
with producers and used financial derivatives, includ- erned company in 2007 and in 2009, the government had
ing swaps, forward and future contracts. It also began to appoint nominated directors to bring the company on
using off-balance sheet financing vehicles, known as Spe- the right track. Table 2 lists some of the critical events for
cial Purpose Entities, to finance many of these transac- Satyam between 1987 and 2009. The case of Satyam’s
tions. accounting fraud has been dubbed as “India’s Enron”.
The creation of the on-line trading model, EnronOnline, From being India’s IT crown jewel and the country’s fourth
in November 1999 enabled the company to develop largest company with high-profile customers, the
further and extend its abilities to negotiate and manage outsourcing firm, Satyam Computers Series, has become
these financial contracts. By the fourth quarter of 2000, embroiled in the nation’s biggest corporate scam in liv-
EnronOnline accounted for almost half of Enron’s trans- ing memory.
actions for all of its business units.
Ramalinga Raju, the Chairman and Founder of Satyam,
In the late 1990s, Skilling refined the trading model fur- who has been arrested and has confessed to a £1 billion
ther. He noted that ‘heavy’ assets, such as pipelines, were fraud, admitted that he had made up profits for years.
not a source of competitive advantage that would enable According to reports, Raju and his brother, B Rama Raju,
Enron to earn economic rents. Skilling argued that the who was the Managing Director, hid the deception from
key to dominating the trading market was information; the company’s board, senior managers, and auditors.
Enron should, therefore, only hold ‘heavy’ assets if they
were useful for generating information. Reasons for the Failure of Satyam
There are two hypotheses regarding the Satyam scam:
This strategy back-fired because Enron bet on complicated
swaps of 20 years contract based on the presumption that Reaction to Window Dressing Hypothesis – The first hy-
the petrol price will fall in the long run. This exposed the pothesis, as claimed by Ramalinga Raju himself, is that
company to unsystematic risk. he faked figures to the extent of Rs. 5,040 crore of non-
existent cash and bank balances as against Rs. 5,361 crore
Economic Risk in the books, accrued interest of Rs. 376 crore (non-exist-
As Enron expanded beyond the natural gas pipeline busi- ent ), understated liability of Rs. 1,230 crore on account of
ness, it also reached beyond the US borders. Enron Inter- funds raised by Raju, and an overstated debtor’s position
national, a wholly-owned subsidiary of Enron, was of Rs. 490 crore. He accepted that Satyam had reported a
created to construct and manage energy assets outside revenue of Rs 2,700 crore and an operating margin of Rs.
the United States, particularly in markets where energy 649 crore while the actual revenue was Rs. 2,112 crore

Table 2: Satyam Timeline
June 24, 1987: Satyam Computers is launched in Hyderabad

1991: Debuts in Bombay Stock Exchange with an IPO oversubscribed 17 times.
2001: Gets listed on NYSE: Revenue crosses $1 billion.
2008: Revenue crosses $2 billion.
December 16, 2008: Satyam Computers announces buying of a 100 per cent stake in two companies owned by the Chairman
Ramalinga Raju’s sons – Maytas Properties and Maytas Infra. The proposed $1.6 billion deal is aborted seven hours later
due to a revolt by investors who oppose the takeover. But Satyam shares plunge 55 per cent in trading on the New York
Stock Exchange.
December 23: The World Bank bars Satyam from doing business with the bank’s direct contracts for a period of eight years in
one of the most severe penalties by a client against an Indian outsourcing company. In a statement, the bank says:
“Satyam was declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain
documentation to support fees charged for its subcontractors.” On the day the stock drops a further 13.6 per cent, it is
lowest in more than four-and-a-half years.
December 25: Satyam demands an apology and a full explanation from the World Bank for the statements, which damaged
investor confidence, according to the outsourcer. Interestingly, Satyam does not question the company being barred
from contracts, or ask for the revocation of the bar, but instead objects to statements made by bank representatives. It also
does not address the charges under which the World Bank said it was making Satyam ineligible for future contracts.
December 26: Mangalam Srinivasan, an independent director at Satyam, resigns following the World Bank’s critical statements.
December 28: Three more directors quit. Satyam postpones a board meeting, where it is expected to announce a management
shake up, from December 29 to January 10. The move aims to give the group more time to mull options beyond just a
possible share buyback. Satyam also appoints Merrill Lynch to review ‘strategic options to enhance shareholder value.’
January 2, 2009: Promoters’ stake falls from 8.64 per cent to 5.13 per cent as institutions with whom the stake was pledged,
dump the shares.
January 6, 2009: Promoters’ stake falls to 3.6 per cent.
January 7, 2009: Ramalinga Raju resigns, admitting that the company inflated its financial results. He says the company’s cash
and bank balance sheet have been inflated and fudged to the tune of INR 50,400 million . Other Indian outsourcers rush
to assure credibility to clients and investors. The Indian IT industry body, NASSCOM (National Association of Software
and Service Companies), jumps to defend the reputation of the Indian IT industry as a whole.
January 8: Satyam attempts to placate customers and investors that it can keep the company afloat, after its former CEO admitted
to India’s biggest ever financial scam. But law firms Izard Nobel and Vianale & Vianale file class action suits on behalf of
US shareholders, in the first legal actions taken against the management of Satyam in the wake of the fraud.
January 11: The Indian government steps into the Satyam outsourcing scandal and installs three people to a new board in a bid
to salvage the firm. The board is comprised of Deepak S Parekh, the Executive Chairman of home loan lender Housing
Development Finance Corporation (HDFC), C Achuthan, Director at the country’s National Stock Exchange, and former
member of the Securities and Exchange Board of India, and Kiran Karnik, Former President of NASSCOM.
January 12: The new board at Satyam holds a press conference, where it discloses that it is looking at ways to raise funds for the
company and keep it afloat during the crisis. One such method to raise cash could be to ask many of its Triple A-rated
clients to make advance payments for services.
and the margin was Rs. 61 crore. Tunneling Hypothesis — The second hypothesis, which
the author of this article believes in, is that Ramalinga
The reason why Ramalinga Raju claims that he did it Raju understated profit to tunnel money to his subsidies.
was because every year he was fudging revenue figures He claimed that the profit margin was only 3 per cent
and since expenditure figures could not be fudged so eas- whereas industry norm is 25 per cent. It is very well known
ily, the gap between actual profit and book profit got wid-
that Satyam understated the price to gain business. That
ened every year. In order to close this gap, he had to buy
is how it acquired 1,180 clients including 185 Fortune
Maytas Infrastructure and Maytas Properties. In this way,
500 companies. Hence, at the most, experts estimated its
fictitious profits could be absorbed through a self-deal-
profit margin to be around 20 per cent. The difference of
ing process. 17 per cent was being tunneled by him. He created more
than 13,000 fictitious salary accounts and siphoned

money worth Rs, 1,300 crore (assuming that he paid an ments for managers to hold the stock purchased through
annual salary of Rs 10 lakh to each employee) every year. option programmes for the long term.
Since he had only 7 per cent stake in Satyam and a major
stake in Maytas Infrastructure and Maytas Properties, he The experience of Enron raises the possibility that stock
compensation programmes as currently designed can
would have pocketed Rs. 7,800 crore of Satyam share-
motivate managers to make decisions that pump up short-
holders’ money in the past six years. Raju set up many
term stock performance, but fail to create medium- or long-
bank accounts and each of these accounts was broken up
into a full account and a sub-account. Only Raju and his term value. Before the fraud became public, most of the
brother, Rama Raju, had access to the full account, while options had already been utilized.
all other authorized persons were given access only to The problem with issuing too many stock options is that
the sub-accounts. Hence, no one except the family mem- managers have windfall gain if company performs well
bers and the confidants of the family had access to com- with no risk if company fails. This prompts managers to
plete information. take much more risk than what shareholders have ini-
tially authorized.
DIFFERENCES BETWEEN
ENRON AND SATYAM CASES Stock options in case of Satyam were very low whereas it
was fairly high in case of Enron. The major beneficiaries
Success or Failure – The Enron debacle was a consequence
of the fraud in case of Enron were top managers while
of the failure of its business model whereas Satyam was a
losers were rest of the employees. In contrast, in case of
consequence of the success of its business model. Hence
Satyam, major beneficiaries were supposed to be promot-
the endeavour of the Enron managers was to hide losses
ers and major losers were small investors. The average
while the promoters of Satyam were busy siphoning off
Enron worker had 62 per cent of his/her 401(k) savings
the profit.
in Enron stock. When the stock price fell from a high of
Agency cost vs Tunelling – Enron is a classic case of agency $90 to less than $1 a share, most Enron workers found
cost – managers took undue risk with the hope that if the their retirement funds just about wiped out. Further, while
outcome is in company’s favour, they will benefit because Enron’s stock plummeted, the 401(k) plan was “locked
of ESOP and if they fail, then the losses will be borne by down” during an administrative “blackout period,” pro-
small investors and employees. In contrast, Satyam was hibiting those over 50 years from selling their shares. This
a case of tunneling – promoters siphoned off money prohibition, however, did not apply to the executives, who
through self-dealing. Thus, promoters were involved in owned shares or controlled stock options.
the Satyam case while managers were involved in the
Hardware vs Software – Enron started successfully in
Enron case.
hardware and ultimately failed because of the top man-
Role of ESOP – As in most other US companies, Enron’s agers’ focus on software where it took unreasonable risk
management was heavily compensated using stock op- (Healy and Palepu, 2003). In contrast, Satyam started
tions. Heavy use of stock option awards linked to short- successfully in software and ultimately failed because of
term stock price may explain the focus of Enron’s the promoters’ unending thirst for real estate. Hence, it
management on creating expectations of rapid growth was the hardware part of the business which led to the
and its efforts to puff up reported earnings to meet Wall downfall of Satyam.
Street’s expectations.
Chances of Bankruptcy – In case of agency effect, if man-
On December 31, 2000, Enron had 96 million shares out- agers have their own way and investors are careless, the
standing under stock option plans, almost 13 per cent of end result will be bankruptcy. This is because, the man-
common shares outstanding. agers will try to hide the losses till all the net worth gets
eroded. In case of tunneling, profit is siphoned, and as
The stated intent of stock options is to align the interests and when this fraud comes into public knowledge, this
of management with shareholders. But most programmes self-dealing could be stopped and company could be
award sizeable option grants based on short-term ac- again brought back on track. That is the reason why Enron
counting performance, and there are typically few require- had to file for bankruptcy while Satyam shares re-bounced

from Rs. 6 to Rs. 55 within a month of the government ference is that in case of Enron, it was assets which were
appointing nominee directors. transferred from parent company to SPVs in lieu of shares
of SPVs or fictitious debtors were created through false
Outward Strategy – Enron invested heavily in Dabhol invoice while in the case of Satyam, assets of SPVs were
and lost badly due to the change in the government in
transferred to the parent company and in return, pay-
Maharashtra (a state in India), which became the starting
ment was made in cash. Who owns the stake in the SPVs
point of fall of Enron. In contrast, Satyam got listed in
was immaterial in case of Enron but was very important
NASDAQ, where investors are lot more aware about their in case of Satyam because higher the stake of promoters,
rights. It was at NASDAQ that investors started reacting higher will be the money they can earn through tunneling.
negatively to the buyout of Maytas, which led to battering
of the Saytam shares at the bourses. Hence America be- ANALYSIS OF SELF-DEALING PROBLEM
came the cause of fall of an India company and India
became the cause of fall of an American company. It is unanimously believed by the experts that self-deal-
ing (which included both agency cost and tunneling)
Application of Special Purpose Vehicles (SPVs) — In the could not be merely controlled by market forces, and legal
case of Enron, SPVs were created to carve out a division regulation should be enacted to deal with the problem.
or business unit which is incurring heavy losses so that Total ban on self-dealing is not a viable alternative be-
the balance sheet of the parent company could be cleaned cause there may be many situations when self-dealing
up of those losses. In Enron’s case, assets that were los- may be beneficial for the shareholders. Hence most of the
ing money were sold to SPVs and got it entered in the countries use two legal rules to regulate the self-dealing
book of accounts as earnings. However, to be legitimate, problem.
accounting rules require that an SPV be legally isolated
from the company that created it. In Enron’s case, this Property Rule – Majority-of-the-minority vote by uninter-
was not true. The external auditing firm, Arthur Andersen, ested shareholders, which prevents any transactions from
failed to act in part because it made more money provid- proceeding without the minority group’s consent. The
ing consulting services for Enron than it did providing disadvantage of this rule is that this may lead to either
auditing services. This delayed the share price from tak- strategic voting (promoters or managers may bribe some
ing a biting till the time when managers became eligible of the uninterested shareholders to vote in favour of the
to liquidate their options. Around 4,000 SPVs were cre- deal even though it may not be beneficial for the com-
ated to hide losses. pany) or holding out (even though the deal may be ben-
eficial for the company but still minority shareholders
Satyam also created SPVs but the modus operandi and ob- may not vote because they expect bribe in order to vote).
jectives were quite different. SPVs were created to inte-
grate a subsidiary through merger so that profit could be Liability Rule – Minority shareholders may go to the court
siphoned out. Maximum siphoning can be done if the and demand compensation in case they suffer a loss.
promoter has low stake in the acquiring company and There are mainly three factors which determine the way
high stake in the acquired company. A tactful handling self-dealing practices affect the corporate sector.
of the process is required. Slowly, the stake of the pro-
moter in the acquiring company is reduced through pyra- Legal Framework
mid structure without outside investors coming to know
about it so that the price of share do not fall rapidly. In Common Law Countries vs Civil Law Countries
case the public gets the negative news that promoters are Conflict of interest between corporate insiders, such as
reducing their stake, it will reduce the share price and managers and controlling shareholders, on the one hand,
antagonistic shareholders may look at all the acquisitions and outside investors, such as minority shareholders, on
with suspicion. In order to secretly reduce the stake, pro- the other hand, are central to the analysis of the modern
moters divest through pyramid structure. This allows the corporation (Berle and Means, 1932). The insiders who
promoters to control maximum number of companies with control corporate assets can use these assets for a range
minimum of their own resources. The pyramid structure of purposes that are detrimental to the interests of the
could be implemented through SPVs. Hence, the key dif- outside investors. Most simply, they can divert corporate

assets to themselves, through outright theft, dilution of between common law countries and civil law countries.
outside investors through share issues to the insiders, The strength of the regulation of self-dealing in the UK
excessive salaries, asset sales to themselves or other cor- lies in the heightened scrutiny of transactions involving
porations they control at favourable prices, or transfer related parties before they may be approved rather than
pricing with other entities they control (Shleifer and in favouring litigation by minority shareholders. This has
Vishny, 1997). Alternatively, insiders can use corporate led legal scholars to remark that “Judicial assessment of
assets to pursue investment strategies that yield them the fairness of self-dealing transactions has not been a
personal benefits of control, such as growth or diversifi- significant part of the British law.” In fact, minority share-
cation, without benefiting outside investors (Baumol, holders face a high burden of proof in challenging the
1959). transaction because it was approved by disinterested
shareholders with both the advice of independent finan-
What is meant by insiders varies from country to country. cial experts and full disclosure of all material informa-
In the US, the UK, Canada, and Australia, where owner- tion (La Porta, Lopez-de-Silanes and Shleifer, 1999). What
ship in large corporations is relatively dispersed, most
this means is that in case of common law countries, man-
large corporations are to a significant extent controlled
agers usually have the discretion to engage in a self-deal
by their managers. In most other countries, large firms
without the approval of shareholders but in that case, it
typically have shareholders that own a significant frac- is the management who has to prove in the court that
tion of equity, such as the founding families (La Porta, they have not benefited by such self-deal. In case manag-
Lopez-de-Silanes, and Shleifer, 1999). The controlling ers take the approval of shareholders, the onus of proof
shareholders can effectively determine the decisions of shifts to the petitioner to prove that management has si-
the managers (indeed, managers typically come from the phoned off money.
controlling family), and hence the problem of managerial
control per se is not as severe as it is in the rich common The US does not require shareholder approval for related-
law countries. On the other hand, the controlling share- party transactions and instead emphasizes litigation to
holders can implement policies that benefit themselves at protect minority shareholders against self-dealing. France
the expense of minority shareholders. Regardless of the allows related party transactions to be carried out with-
identity of the insiders, the victims of insider control are out shareholder approval if they take place on “normal”
minority shareholders. It is these minority shareholders terms. However, it is easy to challenge related-party trans-
who would typically prefer dividends instead of rein- actions that take place without shareholder approval.
vestment of profit for expansion.
The buyer is required to make full disclosure in 57 per
Common law countries (US, UK, Canada, Australia, etc.) cent of the common law countries, but in only 25 per cent
depend on liability rule; property rule is optional. In the of the civil law countries. Consistent with this pattern, an
case of civil law countries (France, Germany, Japan, etc.), independent review of the transaction is required in 48
property rule is predominant. The advantage of depend- per cent of the common law countries but only 24 per cent
ing heavily on liability rule is that the company has pow- of the civil law ones (La Porta, Lopez-de-Silanes and
ers to implement decisions for its overall benefit without Shleifer, 1999).
having to take prior approval of disinterested directors
and shareholders. In case managers siphon off money, Common law countries typically require both extensive
the court will penalize them heavily. disclosure and the approval of the transaction by disin-
terested shareholders. In contrast, civil law countries typi-
In the case of common law countries, minority shareholder cally have fewer disclosure requirements and entrust the
interest is given more importance than civil law coun- approval of self-dealing transactions to the CEO or the
tries. Disinterested shareholders must approve the trans- board of directors
action in 48 per cent of the common law countries but
only 16 per cent of the civil law countries. In contrast, the Ease with which Minority Shareholders
CEO may single-handedly approve the transaction in 20 may Prove Wrongdoing
per cent of the civil law countries but never in the com- Rescinding the transaction is impossible in 66 per cent of
mon law countries. UK is an enigma in the classification the civil law countries and requires proving fraud in the

remaining 28 per cent. Shareholders controlling 10 per agency problem is more prevalent in the US than in the
cent of the stock can sue promoters and the other direc- UK.
tors in 90 per cent of the common law countries and in
In case of India, although law is quite favourable to mi-
roughly 80 per cent of the Scandinavian and German le-
nority shareholders, its tardy execution in the court takes
gal origin countries. In contrast, shareholders have a
away that advantage. Long legal battle, inadequate pro-
standing to sue in only 56 per cent of the French civil law
tection of witness by police which force them to turn hos-
countries. (La Porta, Lopez-de-Silanes and Shleifer, 1999).
tile, and ineffective whistle blowing policies give
The index of ex-post private control of self-dealing encapsu- promoters undue advantage.
lates the disclosure requirements after the transaction is
India has adopted the UK model mainly relating to self-
approved and the ease of proving wrongdoing. It shows
dealing problem with some flavour of American legisla-
that the disclosure requirements are more stringent and it
tion. In the case of the US, it is not mandatory to take the
is easier for plaintiffs to prove wrongdoing in court in the
approval of minority shareholders before the self-dealing
common law countries than in the civil legal origin ones.
transaction takes place. Minority shareholders can go to
To be more specific, under the Delaware Law, the trans-
the court where the fairness test will be applied and the
action may be approved by the board of directors. In fact,
managers will have to prove that the deal is fair. In case
the Promoter may even participate in the decision. How-
the managers take the approval of minority shareholders
ever, challenging the transaction in court is very easy if,
before approving the self-dealing transaction, the onus of
as we assume, interested directors participate in the deci-
proof shifts to the plaintiff. If the interested party is a di-
sion.
rector or manager without a controlling interest in the
Fair dealing covers such questions as to when the trans- corporation, then business judgment rule is applied. In
action was timed, how it was initiated, structured, nego- case of India, it is mandatory for the management to fol-
tiated, disclosed to the directors, and how the approval of low property rule. Minority shareholders above a given
the directors was obtained. Fair price relates to the eco- per cent can move court if they feel aggrieved by the deal.
nomic and financial considerations of the proposed trans- In the case of merger, it is necessary to go to the court to
action, including all relevant factors. Directors must then get the final approval.
show the ‘entire fairness,’ where all aspects of the issue
are examined. In France, self-dealing agreements must Arm’s Length Relationship-based Capital Market vs
first be approved by the Board of Directors and then by Relationship-based Banking System
disinterested shareholders. The requirement to obtain The distinction between arm’s length relationship-based
shareholder approval for related party transactions is easy capital market and relationship-based banking system is
to avoid in France. However, related party transactions very important for analysing the corporate structure of
are easy to challenge if they are not approved by the share- an economy ((Rajan and Zingales, 1995). Chandler (1972)
holders. In practice, shareholder approval is almost al- had distinguished between European family capitalism,
ways sought. American managerial capitalism, and Japanese group
capitalism. Mostly, but not completely, American mana-
Impact of Legal Framework on Self-Dealing
gerial capitalism is based on arm’s length relationship
Judiciary is called the soft infrastructure of a nation. The where the financer is protected by explicit contracts and
way laws are codified by the legislature may be fairly transparency. In case of group capitalism and family capi-
different from the way the court interprets them. In nor- talism, relationship-based banking system is the predomi-
mal situations, the US favours minority shareholders but nant method of financing debt. Institutional relationship
in times of corporate action, be it, ESOP, management com- matters more and the market becomes a less important
pensation, Mergers & Acquisitions or bankruptcy pro- medium for finalizing the terms of transaction. Agency
ceedings, the court is known to apply ‘Business Judgment effect is more predominant in case of arm’s length rela-
Rule’ and give wide discretion to the managers (Dela- tionship-based system and tunneling problem is more
ware courts are well known for this bias). In contrast, the frequent in case of relationship-based banking system.
UK courts are known to favour employees and minority Firms in France, Germany, and Japan are more highly
shareholders. That is the reason why the incidence of levered than firms in the US and the UK.

Most of the tunneling takes place through SPVs that are ity rule because they have efficient legal enforcement sys-
financed by the banks. Banks’ top management has a good tem in place. Most of the underdeveloped countries de-
relation with the promoters and hence finance such SPVs. pend on property rule because this reduces the pressure
Sometimes, as in the case of Harshad Mehta, Ketan on the limited legal system with large pending cases.
Parekh and others, brokers, bankers, and promoters form
Black money is the main source of tunneling surplus from
a nexus and the booty is shared amongst them. Enron did
which promoters tend to finance their new ventures in
not require the help of the banks as it was only transfer-
underdeveloped countries. Many experts are of the view
ring the assets in lieu of shares of SPVs. In the case of
that in the absence of efficient capital market, this acts as
Satyam, since SPVs needed to be first stuffed with tangi-
internal capital market for business houses to allocate
ble assets, it required bank finance and later on, bought it
resources. A major share of the black money belongs to
at higher than market value and siphoned off the money.
minority shareholders which are expropriated by the pro-
Tunneling is implemented through the mechanism of moters.
SPVs. In order to finance the SPVs, debt is required. Eq-
Since a company is brought into existence by the pro-
uity is introduced through the pledging of shares of pro-
moter, he has certain inherent rights over the company.
moters of the parent company to the banks and generating
Law cannot infringe on those rights. Regulators micro-
funds to finance SPV equity base. The SPV corpus is ex-
managing the company is also not usually effective. It is
panded through acquiring debt finance through banks.
not mere legal provisions, but efficient judiciary, vibrant
India does not have a well-developed retail debt market
capital markets, effective surveillance by regulators, and
like the US. In the case of countries strong in arm’s length
proactive participation of outside shareholders in the
relationship-based financial system, possibility of
corporate affairs of the company, especially in the selec-
tunneling is less compared to countries with relationship-
tion of board of directors and approval of resolutions,
based banking system.
which are the key remedies to prevent such cases. Certain
Developed Countries vs Developing Countries clues like promoters setting up too many subsidiaries,
frequent changes and resignations in board of directors,
As the country develops, shareholding gets diversified;
consistent decrease in promoter stake or increasing liqui-
risk premium in investing in capital market tends to de-
dation of equity options, are clear signs of these problems
cline; and power shifts from promoters to managers and
cropping up. On the part of the shareholders, they should
technocrats. Hence, developing countries are more sus-
be suspicious of any self-dealing transactions. Since the
ceptible to tunneling.
time of Harshad Mehta, when stock brokers, promoters of
In LDCs, law enforcement is always a problem because the company, and bankers connived to fool small inves-
enactment of law by the Parliament is fairly easy but its tors, enforcement agencies view even large banking trans-
implementation by corrupt judiciary, police, and politi- actions with suspicion. Regulatory institutions should
cians is tardy. Ramalinga Raju bribed them and had close have clearly defined roles so that promoters do not resort
nexus which made enforcement of corporate governance to regulatory arbitrage to serve their interests at the cost of
norms very difficult. When the minority shareholders are other shareholders.
not sure whether the benefits of the company’s success
will be fairly distributed, they put high risk premium in
CONCLUSION
buying the shares. Also, their expectations of increase in Unlike Enron, which sank due to agency problem, Satyam
the price of shares is very high because they know very was brought to its knee due to tunneling. The company
well that all the retained earning will be siphoned off by with a huge cash pile, with promoters still controlling it
the controlling shareholders. This is the reason why only with a small per cent of shares (3%), and trying to absorb
2 per cent of the shareholders invest in India compared to a real estate company in which they have a majority stake
37 per cent in the US. Volatility of Indian stock exchange is a deadly combination pointing prima facie to tunneling.
is more than in case of developed countries because ex- Promoters have consistently pledged their shares to fi-
pectations of price rise is more in underdeveloped market nancial institutes to raise finance to buy land for Maytas
as that is the only source of profit for the investors. Most Infrastructure and Maytas Properties. Higher the value
of the developed countries depend heavily on the liabil- of land bank of Maytas Infrastructure and Maytas Prop-

erties, higher will be the deal with Satyam, and greater Many econometric models have been developed to calcu-
will be the proportion of funds that could be siphoned late agency effect like Morck, Shleifer and Vishny (MSV)
off. Time was ticking for Rajus because they were facing Model, McConnell and Servaes (MS) Model, Short and
threat of takeover due to the decreasing stake of the pro- Keasey (SK) Model, etc., but they are not applicable to
moters. Starting point of any tunneling process is the regu- calculate tunneling effect because promoters’ stake tends
lar decline in the stake of promoters in the acquiring to affect different set of variables more compared to mana-
company and increase in stake in the target company. gerial stake. Hence there is a need to develop distinct
High stake of promoters at the time of tunneling may lead econometric models to calculate the tunneling effect.
to significant loss to promoters since investors will de-
crease the value of the company if they come to know Usually, tunneling may not lead to sickness of the com-
about it. pany (unless it is a case of vanishing company) because
the promoter is more interested in milking the cow rather
Origin of the legal system, framework of the financial sys- than killing it. He would like the original companies to
tem, and level of development are the key factors which finance new companies set up by him. In case of agency
determine the level of agency effect and tunneling prob- cost, many remedial measures have been suggested to
lem. Agency effect and tunneling phenomena focus on align the interest of managers with that of the sharehold-
the divergence in the interest of managers, promoters, and ers. In addition to the normal text book remedies to deal
shareholders. Corporate finance is based on the assump- with the agency cost, Jensen (1989) has gone to the extent
tions of separation of ownership and management and of recommending increase in debt, leverage buyout, and
perpetual continuity of corporation. If these two assump- privatization of companies (which he calls as eclipse of
tions are dropped, then many of the widely accepted theo- public corporation) as solutions to deal with the agency
ries may not hold; for example, the capital structure cost.
decisions and the way risk and cost of capital is calcu-
lated. Suppose the promoter himself is in charge of the If these destructive self-dealing activities are detected at
company, then the cost of equity may not be relevant for an early stage, then the company could be revived by a
decision-making because increase in dividend and capi- change in the Board of Directors, and in the extreme case,
tal gain may be a benefit and not a cost for him. In fact, in the government has to take control of the company and
appoint its own nominees. In case such activities could
case of vanishing companies, not only returns, but also
not be detected at an early stage, liquidation is the only
the principal amount of other shareholders is expropri-
solution. It is also important to expedite the proceedings
ated by the promoters. The concept of cost of capital and
the valuation of the company based on free cash flow of criminal prosecution of promoters, who indulge in de-
discounting method becomes invalid in such situations. structive self-dealing activities, to discourage other peo-
Regarding capital structure decisions, in case of promoter- ple to resort to such practices. Only then the capital market
driven companies, reverse pecking order theory works can be vibrant and small investors will be confident to
better according to various studies in the Western coun- invest in the Indian market, since they will perceive risk
premium to be low.
tries.
REFERENCES
Baumol, William (1959). Business Behavior, Value and Growth, Jensen, Michael and Meckling, William (1976). “Theory of
New York: Macmillan. the Firm: Managerial Behavior, Agency Costs, and Capi-
tal Structure,” Journal of Financial Economics, 3(4), 305-360.
Berle, Adolf and Means, Gardiner (1932). The Modern Corpora-
tion and Private Property, New York: Macmillan La Porta, Rafael; Lopez-de-Silanes, Florencio; Shleifer, Andrei;
and Vishny, Robert, (1998). “Law and Finance,” Journal
Chandler, Alfred (1972). Strategy and Structure, MIT Press of Political Economy, 106(6), 1113-1155.
Healy, Paul M and Palepu, Krishna G (2003). “The Fall of La Porta, Rafael; Lopez-de-Silanes, Florencio and Shleifer,
Enron,” Journal of Economic Perspectives, 17(2), 3-26. Andrei (1999). “Corporate Ownership Around the
Jensen, Michael C (1989). “Eclipse of the Public Corporation,” World,” Journal of Finance, 54(2), 471-517.
Harvard Business Review, September-October, 61-74.

Rajan, Raghuram and Zingales, Luigi (1995). “What do we Shleifer, Andrei and Vishny, Robert W (1997). “A Survey of
Know about Capital Structure? Some Evidence from the Corporate Governance,” Journal of Finance, 52(2), 737-
International Data,” Journal of Finance 50(5), 1421-1460. 783.
Srinivas Shirur is the Director and a Senior Professor of Fi- tral University), New Delhi. He was awarded JRF by the UGC
nance and Economics at the Galgotias Institute of Manage- to pursue his doctorate. He has written four books on topics
ment Technology, Greater Noida. A Graduate in Economics relating to Finance and Economics. Around 50 of his articles
(Hons) from Delhi University, he is also an M.A in Econom- have been published in reputed journals. He has been in-
ics from Osmania University and an MBA in Finance from volved with various consultancy projects.
Punjab University. He has earned his Ph.D. in Finance from
the Department of Business Studies, Jamia Millia Islamia (Cen- e-mail: shirur@gmail.com
Business social responsibility should not be coerced;

it is a voluntary decision that the entrepreneurial
leadership of every company must make on its own.
— John Mackey

Accounting Horizons American Accounting Association
Vol. 26, No. 3 DOI: 10.2308/acch-50179
2012
pp. 583–599
COMMENTARY
Corporate Governance in the Indian Context

R. Narayanaswamy, K. Raghunandan, and Dasaratha V. Rama
SYNOPSIS: We provide a brief overview of corporate governance in India, including a

description of Indian contextual differences (as compared to the U.S. and elsewhere)
and a discussion of the major events contributing to the evolution of India’s corporate
governance/accounting/auditing practices since economic deregulation in 1991. We also
offer an agenda for future research on important Indian governance/accounting/auditing
issues, and briefly address accounting practice implications.
Keywords: India; corporate governance; accounting; auditing.
INTRODUCTION
I
n their summary of corporate governance research, Carcello et al. (2011, 23) note that:
The majority of the published research in corporate governance examines U.S. firms. Just
as differences in firm characteristics may affect the optimum governance arrangements,
differences across countries may affect the optimum governance arrangements . . . Much
of world economic growth is now occurring in developing countries—particularly in the
BRIIC nations (i.e., Brazil, Russia, India, Indonesia, and China). Given the importance of
these countries to the world economy, and given very different cultural, legal, and
regulatory traditions, optimum corporate governance mechanisms in an Anglo-American
context may not be effective or at least not as effective.
A quick check of the major accounting journals published in English, including non-American
journals (i.e., those with an emphasis on the British Commonwealth countries), indicates that
empirical research related to governance/accounting/auditing has focused overwhelmingly on the
U.S. and similar institutional settings (Australia, Canada, New Zealand, U.K., etc.). As seen in
Table 1, there also appears to be growing interest related to China.
India is one of the major, emerging economies in the world. India’s importance in the global
economy has increased in recent years, and, as with the other BRIIC (Brazil, Russia, Indonesia,
China) nations, India’s role in global commerce is expected to grow in the future. The Indian
R. Narayanaswamy is a Professor at the Indian Institute of Management Bangalore, and K. Raghunandan and
Dasaratha V. Rama are Professors at Florida International University.
We thank the Editor (Dana Hermanson) and two reviewers for their many useful comments and suggestions.
Submitted: October 2011
Accepted: March 2012
Published Online: September 2012
Corresponding Author: K. Raghunandan
Email: raghu@fiu.edu
583
584 Narayanaswamy, Raghunandan, and Rama
TABLE 1
Accounting, Auditing, and Governance Papers in Selected Accounting Journals
2001–2011
Articles Focusing On
Journal China India
North American Journals:
The Accounting Review 2 0
Journal of Accounting Research 1 0
Journal of Accounting & Economics 1 0
Contemporary Accounting Research 1 0
Review of Accounting Studies 2 0
Auditing: A Journal of Practice & Theory 8 0
Accounting Horizons 1 0
Journal of International Accounting Research 7 1
Non-American Journals:
Accounting, Organizations & Society 8 0
Abacus 1 0
Accounting and Business Research 2 0
Journal of Business, Finance & Accounting 5 1
British Accounting Review 4 0
We exclude papers that (1) use subjects from multiple (more than two) countries and included subjects from China or
India as part of that process, or (2) focus on Hong Kong or Taiwan.
approach to corporate governance, accounting, and auditing differs in many ways from the U.S.
model (and the Chinese model). As such, the Indian context provides an important, unique setting
for research. Yet, in contrast to China, empirical research related to governance/accounting/auditing
in India is nonexistent in the major accounting journals.
This paper aims to encourage research in the Indian context, to begin filling this gap in the
literature. We begin by explaining the Indian contextual differences (as compared to the U.S. and
elsewhere). This is followed by a discussion of the major events contributing to the evolution of
India’s corporate governance/accounting/auditing practices since economic deregulation in 1991.
We then compare and contrast salient corporate governance standards and practices between the
U.S. and India, with reasons drawn from the contextual differences. This in turn leads us to offer an
agenda for future research on important Indian governance/accounting/auditing issues, and briefly
address accounting practice implications. Our hope is that this commentary will motivate research
on Indian governance and accounting issues, and will also highlight emerging developments for the
accounting practice community.
INSTITUTIONAL FRAMEWORK
We begin with a description of the institutional environment of corporate governance in India,
and highlight issues where there are significant differences between India and the U.S. Table 2
provides a summary of the issues, and we expand on the issues next.
Regulation of Companies and Stock Exchanges

India has a long tradition of public companies and stock exchanges. Unlike in the U.S., where
there are differences across the 50 states in terms of company law, in India the Companies Act, a
Accounting Horizons
September 2012
TABLE 2
Corporate Governance, Accounting, and Auditing
Institutional Differences between U.S. and India
Item U.S. India
September 2012
Company law Governed by individual state laws, different for each state. Central (i.e., federal) government law, Companies Act of
Accounting Horizons
1956 (with periodic amendments).
Government-owned Not publicly traded. Many large publicly traded companies with majority
corporations ownership by central and state governments.
Regulation of stock The Securities and Exchange Commission, since 1934. Ministry of Finance, up to 1988; Securities and Exchange
exchanges Long history of relatively apolitical policing of markets Board of India (SEBI), statutory body, since 1992.
and registrants. Developing history of independent regulation.
Stock ownership Widely dispersed; typically very little ownership by Substantial ownership by founding families, even among
founders, except in smaller companies. the largest public companies.

Litigation environment Class action lawsuits on behalf of shareholders; strong No provision for class action litigation. Sick Industrial
plaintiff’s bar. Relatively efficient process for Companies (Special Provision) Act for insolvent
bankruptcy and liquidation. companies is quite unfriendly for creditors.
Audit firms Practice as part of international networks, using their Big 4 and others cannot practice auditing in India in their
international brand names; many private sector lawsuits international names. Private lawsuits against auditors
against auditors. alleging malpractice almost nonexistent.
Types of directors and board Two types: Independent or nonindependent. Three types: Executive, nonexecutive, or independent.
composition NYSE and NASDAQ require majority of independent At least 50 percent of the board of directors must be
directors on the board. nonexecutive directors. The minimum number of
independent directors must be (1) one-half of the board
for a company if the chairman is a company executive,
and (2) and one-third of the board for a company with
a nonexecutive chairman.
Audit committee At least three directors, all of whom must be independent. At least three directors; at least two-thirds of the
committee must be independent directors.
Accounting standard setting Delegated to the private sector; FASB sets accounting Government sets accounting standards, with input from
standards. professional regulatory bodies, industry associations,
SEBI, Reserve Bank of India, and Comptroller &
Auditor General.
585
central (i.e., federal) government law—as opposed to state government law—regulates the
formation, functioning, and dissolution of companies. The Companies Act is a comprehensive code
that covers the entire life cycle of a company and is administered by the Ministry of Corporate
Affairs of the Government of India.
One important difference from the U.S. is that the Companies Act does not provide for
shareholder class action, and lawsuits against auditors are rare. Furthermore, the size of potential
penalties is usually not a sufficient deterrent.1 Another important difference relates to the
bankruptcy or dissolution of public companies. While the Companies Act deals with bankruptcy,
there is also a special law, the Sick Industrial Companies (Special Provision) Act of 1995, which
provides for the reorganization of insolvent companies; the provisions of this law are much more
onerous for creditors than the bankruptcy law in the U.S.
There are two national stock exchanges in India: the Bombay Stock Exchange (BSE)
established in 1875 and the National Stock Exchange (NSE) established in 1992.2 Public
companies that are listed on a stock exchange must comply with securities regulations in addition to
the Companies Act requirements. Unlike in the U.S., prior to 1988, the stock exchanges were
directly overseen by the Central Government’s Ministry of Finance. The Securities and Exchange
Board of India (SEBI) was formed in 1988 by an executive order of the government and became a
statutory body in 1992; SEBI now administers securities regulations.
Family Ownership and Control

One important difference between the U.S. and India is that many of even the largest listed
Indian companies are majority-owned or otherwise controlled by founding families (known as
promoters in India). These characteristics of the Indian ownership model make it quite distinct from
the U.S. model of widespread equity ownership. In India, the promoters can take actions that can
hurt minority shareholders, such as by issuing preferential shares to the promoters or their relatives
at a discount relative to market price or investing in or transacting with entities in which the
promoters or their relatives have an interest.
To shed some light on this issue, we provide details about the proportion of beneficial shares
owned by promoters in some of the largest Bombay Stock Exchange-listed companies. We begin
with all 500 firms in the Bombay Stock Exchange 500 Index (BSE 500 Index) as of March 31,
2010. The BSE 500 has the most actively traded firms, including those that are majority-owned by
the Government of India or the state governments. We then delete firms that (1) have a fiscal year-
end other than March 31 (which is the fiscal year-end for the majority of Indian companies, and also
is the end of the tax year), (2) are majority-owned by the Government of India or the state
governments, and (3) do not have annual reports available for each of the three years ending March
31, 2008, 2009, and 2010 in the ReportJunction.com database of Indian corporate annual reports.3
Table 3 presents the extent of family ownership for our sample. Founding families had majority
stock ownership in 36 percent of the firms in the year 2010. These include well-known companies,
such as Wipro (80 percent, IT outsourcing), DLF (79 percent, realty), Sun TV Networks (77
percent, media), Fortis Healthcare (76 percent, healthcare), Tata Consultancy Services (74 percent,
IT outsourcing), Reliance Communications (68 percent, communication), and Kingfisher Airlines
(55 percent, aviation). The mean founding family ownership is 40 percent in our sample of 323
firms.
1
For example, the punishment for noncompliance with financial reporting requirements is either six months of
imprisonment, a maximum fine of Rs 2,000 ($45), or both.
2
Of the two, the NSE is larger in trading volumes, while the BSE has more listed securities.
3
March 31 is the end of the fiscal year for the Government of India and is also the tax year end for companies, and
hence is used as the fiscal year-end by the overwhelming majority of Indian companies.
Accounting Horizons
September 2012
Corporate Governance in the Indian Context 587
TABLE 3
Family Ownership and Control of Listed Indian Firms
Firms
Percentage of Founding
Family Stock Ownership Number Percentage
0 30 9
1–10 9 3
11–20 13 4
21–30 52 16
31–40 42 13
41–50 58 18
51–60 56 17
61–70 40 12
Above70 23 7
323 100
The 323 firms are selected as follows. We begin with all 500 firms in the Bombay Stock Exchange 500 Index (BSE 500
Index) as of March 31, 2010. The BSE 500 Index has the most actively traded firms, including those that are majority-
owned by the Government of India or the state governments. We then delete firms that (1) have a fiscal year-end other
than March 31 (which is the fiscal year-end for the majority of Indian companies, and also is the end of the tax year), (2)
are majority-owned by the Government of India or the state governments, and (3) do not have annual reports available
for each of the three years ending March 31, 2008, 2009, and 2010 in ReportJunction.com. The percentages do not add to
100 due to rounding error.
Directors and Audit Committees

U.S. stock exchange regulations make a distinction between two types of directors:
independent and nonindependent. By contrast, Clause 49 in the SEBI’s listing agreement makes
a distinction among three types of directors: executive, nonexecutive, and independent directors. A
nonexecutive director need not be independent; in practice, in a majority of the listed companies,
there is at least one director who is nonexecutive but not independent.
In the U.S., the NYSE and NASDAQ require that the majority of a company’s board be
comprised of independent directors. By contrast, in India, SEBI rules require that at least half the
members of the board of directors must be nonexecutive directors, but the number of independent
directors depends on whether a company has an executive or nonexecutive chairman. The minimum
number of independent directors must be (1) one-half of the board for a company if the chairman is
a company executive, and (2) one-third of the board for a company with a nonexecutive chairman.
The SEC has long recognized the importance of an independent audit committee in ensuring
high quality financial reporting. Accordingly, the U.S. stock exchanges require listed companies to
have audit committees that have at least three members, all of whom must be independent. The
SEBI also requires that the audit committee of the board must have a minimum of three members,
but a key difference is that the SEBI only requires at least two-thirds of the committee to be
independent directors.
Financial Reporting and Auditing

In the U.S., the SEC has delegated accounting standard-setting to the private sector. Since
1973, the Financial Accounting Standards Board sets applicable accounting standards. In contrast, a
notable feature of India is that companies must comply with accounting standards issued by the
government. The standard setting process differs from that in the U.S., in that there is a far greater
Accounting Horizons
September 2012
degree of regulatory involvement. A committee consisting of representatives of professional

regulatory bodies, industry associations, the securities regulator, the Reserve Bank of India (similar
to the Federal Reserve Board of the U.S.), and the Comptroller and Auditor-General of India
(similar to the Comptroller of the U.S. GAO) advises the government on accounting standards.
The Companies Act requires that a company’s accounts be audited by an auditor, who must be
a chartered accountant (i.e., a member of the Institute of Chartered Accountants of India [ICAI]).
Unlike in many other countries, the ICAI does not allow accounting firms to practice auditing in
India in their international names, such as Deloitte or Ernst & Young. Hence, international firms
have to practice in association with domestic firms. For example, Lovelock & Lewes, Fraser &
Ross, and PricewaterhouseCoopers are PwC’s audit face in India. Thus, multiple Indian audit firms
could be (and are) associated with a specific Big 4 firm.4
Finally, in the U.S., internal controls and financial statements are recognized as the
responsibility of management; for example, Sections 302 and 404 of SOX require certifications by
the CEO and CFO. In contrast, under the Companies Act, in India, it is the directors who are
responsible for the financial statements. The law requires a directors’ responsibility statement
indicating that the directors have (1) followed applicable accounting standards in the preparation of
the financial statements, (2) selected accounting policies and applied them consistently and made
judgments and estimates that are reasonable, (3) taken proper and sufficient care for the
maintenance of adequate accounting records and for preventing and detecting fraud and other
irregularities, and (4) prepared the financial statements on a going concern basis. Listed companies
must file a CEO/CFO certificate about internal control and financial reporting, in addition to the
directors’ responsibility statement.
EVOLUTION OF CORPORATE GOVERNANCE IN INDIA

At the time of independence in 1947, India adopted a socialist way, characterized by a regime
of central planning, permits, and quotas for industrial production. This regime continued with
varying degrees of change, until finally in 1991 the government embarked on a major policy
change. Successive democratic governments, under different political parties and coalitions, have
continued down the path of economic liberalization, although with varying degrees of zeal.
One feature, perhaps not unique to countries other than the U.S., is the presence of companies in
which the central government, one or more state governments, or any combination of these owns a
majority of the share capital. There were quite a few such companies prior to 1991, when the Indian
government started its policy of reducing the involvement of the government in the economy. Over
the past two decades, a succession of governments (both central and in the individual states), have
slowly divested their shareholdings in some companies. Yet, even now, there are many large public
companies in which the majority shareholder is the central or a state government.5 These companies
have unique operating environments, such as job reservations for certain categories of the population,
selection of board members and chief executives based on political considerations, and missions that
do not necessarily have shareholder wealth maximization as one of the top goals.6 Our subsequent
discussions exclude firms where the government(s) is the majority shareholder.
4
Many prior studies have examined the role of the Big 4 in developing countries, and some recent studies seek to
examine the role of audit firm specialization across global versus national settings (e.g., Carson 2009). Given the
ICAI rules related to audit practice in India, relying on generic databases without a detailed knowledge about the
Indian affiliate audit firms to identify clients audited by the Big 4 network can lead to incorrect inferences.
5
For example, majority government-owned public companies include Bharat Heavy Electricals, Indian Oil
Corporation, Oil and Natural Gas Corporation, and Steel Authority of India. These companies are some of the
largest in India measured in terms of revenues, total assets, or market capitalization.
6
For example, the Oil and Natural Gas Corporation, in which the government owns 74 percent of the equity
shares, is routinely asked to share a portion of the government’s subsidy burden for petroleum products.
Accounting Horizons
September 2012
Over the years, a number of initiatives have been undertaken by the government, regulators,
and the private sector to reform corporate governance and financial reporting in India. Table 4
provides an overview of such initiatives. These include:
The Confederation of Indian Industry (CII) formed a task force in 1996 due to ‘‘public
concerns regarding the protection of investor interest, especially the small investor; the
promotion of transparency within business and industry; the need to move towards
international standards in terms of disclosure of information by the corporate sector and,
through all of this, to develop a high level of public confidence in business and industry.’’
The task force report, titled ‘‘Desirable Corporate Governance: A Code’’ issued in 1998,
outlined a series of voluntary practices for listed companies. Though a private-sector
initiative, the code became the basis for subsequent official initiatives.
The Kumar Mangalam Birla Committee on Corporate Governance, set up by the SEBI in
1999, was motivated, among other reasons, by ‘‘the financial crisis in emerging markets,’’ a
reference to the 1997 East Asian Crisis. In 2000, the recommendations of the committee
resulted in major changes in the stock exchange listing requirements, including adoption of
Clause 49 (subsequently modified) dealing with various corporate governance-related issues.
Listed companies are required to include a report on corporate governance in their annual
reports, including disclosure of noncompliance with any mandatory requirement of Clause
49, with reasons and the extent to which the nonmandatory requirements have been adopted.
The Naresh Chandra Committee on Corporate Audit and Governance, established by the
Ministry of Finance and Company Affairs in 2002, was a reaction to the corporate scandals
that shook the U.S. in 2001 and 2002, and the enactment of the Sarbanes-Oxley Act (SOX).
The Committee made several recommendations that are substantively similar to the
provisions of SOX related to strengthening corporate audits, disciplinary mechanisms for
auditors, functioning of audit and other board committees, and CEO/CFO certifications
about internal control and financial reporting.7
The Narayana Murthy Committee on Corporate Governance, established by SEBI in 2003,
made recommendations on a variety of issues that were later incorporated into the modified
Clause 49 of the Listing Agreement. SEBI also requires a certificate from the company’s
external auditor on compliance with this clause.
None of these efforts to improve corporate governance was effective in preventing the
spectacular failure of Satyam Computer Services Limited (hereafter, Satyam) in January 2009.8
Satyam was one of the largest information technology (IT) services outsourcing companies in India,
with revenues from software services of Rs 81 billion9 (approximately $2 billion) in the year ended
March 31, 2008. Satyam’s American Depositary Shares (ADSs) were listed on the New York Stock
Exchange, and Satyam had a market capitalization of Rs 273 billion (approximately $6.8 billion) on
March 31, 2008. On January 7, 2009, Mr. B. Ramalinga Raju, chairman and chief executive of
Satyam, resigned after admitting that he had manipulated the company’s financial statements for
several years to show hugely inflated profits and fictitious assets totaling $1 billion (Leahy 2009).
Satyam’s stock plunged from Rs 179 to 6.30 on the next trading day. It is the most high profile case
of the collapse of accounting, auditing, and corporate governance involving an Indian company.10
7
The CEO and CFO are more often termed ‘‘Managing Director’’ and ‘‘Whole-Time Finance Director’’ in India.
8
In Sanskrit (and other Indian languages), ‘‘satyam’’ means ‘‘truth.’’
9
Rs refers to the Indian rupee.
10
The Bombay Stock Exchange’s benchmark Sensex index went down 7 percent on January 7, 2009. As a news
report put it, it was ‘‘a unique case of upheavals at a single company pulling down the Indian stock market’’
(Business Line 2009a).
Accounting Horizons
September 2012
590
TABLE 4
Corporate Governance-Related Developments in India
Formed In/
Committee/ Report Issued Areas of Major
Initiative Formed By in Year Mandate Recommendations
CII Code Confederation of 1996/1998 To develop and promote a code for corporate Appointment of independent directors, limiting
Indian Industry governance to be adopted and followed by Indian directorships to ten listed companies,
companies, be these in the private sector, the reporting key information to the board of
public sector, banks, or financial institutions. directors, and setting up audit committees.
Kumar Mangalam Securities and 1999/2000 (1) to suggest suitable amendments to the listing Composition of the Board (and
Birla Committee Exchange Board agreement . . . and any other measures to improve subcommittees), rules for independent
on Corporate of India (SEBI) the standards of corporate governance in the listed directors and definition of independence,
Governance companies, in areas such as continuous disclosure powers and functions of the audit and
of material information, both financial and compensation committees, accounting
nonfinancial, manner and frequency of such standards and financial reporting, and
disclosures, responsibilities of independent and shareholders’ rights. Some of the
outside directors; recommendations were mandatory, while
(2) to draft a code of corporate best practices; and the rest were voluntary.
(3) to suggest safeguards to be instituted within the
companies to deal with insider information and
insider trading.
Naresh Chandra Government of 2002 To analyze and recommend changes, if necessary, Appointment, duties, liability and
Committee on India, Ministry in diverse areas such as: remuneration of independent directors,
Corporate Audit of Finance and the statutory auditor-company relationship, so remuneration committee, audit committee,
and Governance Company Affairs as to further strengthen the professional nature of separation of the offices of the chairman
this interface; and the CEO, meetings of independent
the need, if any, for rotation of statutory audit directors without other directors, limiting
firms or partners; audit fees from a single client or group to
independence of auditing functions; measures 10 percent, audit partner rotation every six
required to ensure that the management and years, standardizing the language of audit
companies actually present a ‘‘true and fair’’ disclaimers and qualifications,
statement of the financial affairs of companies; whistleblowing policy, effective
enforcement of penalties.
September 2012
Accounting Horizons
Narayanaswamy, Raghunandan, and Rama
(continued on next page)

TABLE 4 (continued)
Formed In/
Committee/ Report Issued Areas of Major
Initiative Formed By in Year Mandate Recommendations
September 2012
the need to consider measures such as
certification of accounts and financial
Accounting Horizons
statements by the management and directors;
adequacy of regulation of chartered
accountants, company secretaries, and other
similar statutory oversight functionaries;
advantages, if any, of setting up an
independent regulator similar to the Public
Company Accounting Oversight Board in the
SOX Act, and if so, its constitution; and
the role of independent directors, and how

their independence and effectiveness can be
ensured.
Narayana Murthy SEBI 2003 To review the performance of corporate Composition and functioning of audit
Committee on governance and to determine the role of committees, audit reports, appointment of
Corporate companies in responding to rumor and other independent directors, director
Governance price sensitive information circulating in the compensation, related party transactions,
market, in order to enhance the transparency risk management, codes of conduct,
and integrity of the market. whistleblowers, and financial disclosures.
Corporate Ministry of 2009 To recommend ways to further improve Separating the role of chairman and chief
Governance Corporate corporate governance standards and practices. executive; stipulating maximum total
Voluntary Affairs/CII tenures for independent directors; limiting
Guidelines the number of independent directorships
for an individual; requiring training of
directors; rotation of audit firms every five
years and audit partners every three years;
instituting a whistleblowing mechanism
with adequate safeguards.
The materials in the ‘‘Mandate’’ column are quotes from the original sources identified in the first column of the table.
591
Satyam was audited by Lovelock & Lewes, a member of the PricewaterhouseCoopers (PwC)
International network, and it had outside directors with impressive profiles. ‘‘India’s Enron’’ has led
to questions about the quality of accounting, auditing, and governance in India and in other
emerging markets. A number of factors, including the globalization of Indian business, the rapid
growth of India’s economy, and the increasing dependence of the developed world on Indian
outsourcing companies, add to the significance of the scandal to managers, accountants, investors,
analysts, and regulators in India and abroad. For the first time, the international media scrutinized
the governance of Indian firms.11
Corporate governance-related efforts subsequent to Satyam include the following:
In the immediate aftermath of Satyam, the CII set up a task force under the chairmanship of
Naresh Chandra in February 2009 to recommend further improvements to Indian corporate
governance standards and practices.
Alarmed by the spillover effects of the Satyam scandal, the Ministry of Corporate Affairs
activated the National Foundation for Corporate Governance (NFCG) to provide a broad
platform to ‘‘deliberate on issues relating to good corporate governance and sensitize
corporate leaders on the importance of good corporate practices.’’ In December 2009, the
Ministry of Corporate Affairs issued the Corporate Governance Voluntary Guidelines, which
are based on the recommendations of the CII’s Naresh Chandra Task Force.
An executive director of the SEBI noted that the SEBI is ‘‘in the process of totally reviewing
our corporate governance norms’’ and that ‘‘there is a strong view in certain quarters that our
[corporate governance] framework is on the lines of the West and may not be best suited for
India, where there are more family businesses’’ (Srivats 2011). This is in the context of
ongoing moves by the SEBI seeking more powers from the Ministry of Corporate Affairs to
streamline all corporate governance norms for listed companies.
The Companies Bill introduced in Parliament in December 2011 requires the auditor to
report any suspected fraud to the government. Given the ongoing debate about auditor tenure
in the U.S., one other interesting feature of the bill is that it limits the tenure of an auditor of a
listed company to two consecutive five-year terms if the auditor is a partnership firm and to
one five-year term if the auditor is a sole proprietor; the firm or individual cannot be
reappointed for five years from the completion of its term.
In summary, there has been a flurry of activities related to corporate governance over the past
two decades. The climate of corporate governance has steadily improved due to such activities. Yet,
there are significant differences in corporate governance practices between India and the U.S. (or
other Anglo-Saxon countries). Next, we discuss such differences.
DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES BETWEEN INDIA

AND THE U.S.
Legal Environment and Market-Based Disciplinary Mechanisms
In the U.S., some states have developed a reputation for being friendly to corporations and also
have well-regarded courts specializing in company law; for example, such a reputation explains
why a large number of public companies have their charters in the state of Delaware. The Delaware
Court of Chancery has issued many landmark judgments related to corporate governance that have
become the accepted standards for corporate conduct nationwide. In contrast, there is no such
11
See, for example, Financial Times (2009), Wall Street Journal Asia (2009), and Kripalani (2009).
Accounting Horizons
September 2012
history of widely accepted standards of behavior that are derived from cases involving companies
or directors in India.12
The absence of shareholder class actions or lawsuits against auditors, coupled with the
insignificant monetary penalties and weak enforcement of the laws, implies that the law is not much
of a deterrent for corporate misconduct. The absence of a vigorous plaintiff’s bar also suggests that
there is no strong private-sector disciplinary mechanism in India. Furthermore, unlike the U.S.,
bankruptcy and business reorganization procedures are weak and ineffective; the time-consuming
procedures provide incumbent management and shareholders significant advantages over creditors.
This in turn means that another mechanism for market-based discipline that is present in the U.S.,
namely activist bondholders, is not available in India.
The friendships formed on the golf courses and the ‘‘good old boy network’’ are important
elements of the business culture in the U.S. and Anglo-Saxon countries. But, personal relationships
become even more important for corporate governance in the Indian context, given the significant
ownership by founding families. This in turn means that informal mechanisms are at least as
important as formal legal procedural mechanisms in diverse contexts.13
Different Types of Agency Costs

Claessens et al. (2000) note that the pyramidal and cross-holding structures prevalent in East
Asia allow controlling owners to commit low equity investment while maintaining tight control of
the firm, creating a separation of ownership (cash flow rights) and control (voting rights). With wide
separation of cash flow rights from control rights, the controlling owner receives the entire benefit
of private rent extraction, but only bears a fraction of the cost.
The ownership concentration issue is particularly relevant in light of the suggestion by Carcello
et al. (2011, 23) that:
[I]n some parts of the world . . . blockholders play a much larger role in corporate
governance. In extreme cases, majority ownership of the firm may be concentrated among
a small group of individuals and entities. Under these conditions, the most pressing agency
conflicts are between majority owners and minority owners. Under this system, a
significant risk to minority shareholders is the misappropriation or misuse of corporate
assets and/or asset transfers from the corporation to majority shareholders at bargain prices
(i.e., tunneling). The corporate governance mechanisms developed in an Anglo-American
context may not be as well suited to addressing these types of agency conflicts as other
governance mechanisms.
Such problems related to separation of cash flow rights and voting rights, as well as tunneling,
are particularly relevant in India—unlike in the U.S. The dominance of debt financing has enabled
many Indian promoters to own majority shares in public companies. Furthermore, equity ownership
is often held through a complex web of corporate cross-holdings in order to avert a takeover and to
12
This contrasts sharply with many pioneering judgments given by India’s Supreme Court and High Courts on
social matters and public policy.
13
The best evidence for this involves the Ambani family. Anil Ambani and Mukesh Ambani are brothers, and
among the richest in the world; both brothers were in the Top 40 of the Forbes list of billionaires in 2009. They
served, and continue to serve, as chief executives of some of India’s largest public companies. After the death of
their father, Dhirubhai Ambani, in 2002, a split developed between the two brothers about who should be the
CEO of the various companies controlled by the family. Instead of fighting it out in court, the two brothers opted
to settle the bitter dispute based on the best arbiter: their mother. Mrs. Kokilaben Ambani, relying on the help of
professionals, settled the dispute that directly impacted millions of shareholders in the public companies headed
by her two sons. While it may be admirable that two bitterly feuding brothers opted to defer to the judgment of
their mother, it also provides an interesting commentary about the corporate governance climate in India.
Accounting Horizons
September 2012
get around regulations. For example, Reliance Industries Limited, India’s largest company by
market capitalization, had 120 subsidiaries as of March 31, 2011.
Satyam is a classic case of separation of cash flow rights from control rights and ‘‘tunneling.’’
As of March 31, 2008, the promoter group held only 8.74 percent of equity but held two full-time
director positions—the CEO and deputy CEO. The CEO and the deputy CEO (brother of the CEO),
along with other family members, formed another company called ‘‘Maytas’’ (i.e., Satyam spelled
backwards) with which Satyam had business transactions.
Role of Independent Directors

The significant ownership by founding families also has implications for the appointment of
nonexecutive and independent directors. Furthermore, even the so-called independent directors
often have other, indirect relationships with the founding family. In many instances, while someone
may technically be classified as independent, there may be other conflicting relationships. For
instance, in the case of Satyam, the chair of the audit committee was the Dean of the Indian School
of Business (ISB), and was classified as an independent director; Satyam’s then chairman,
Ramalinga Raju, was on the ISB’s executive board.14
Thus, form can trump substance when it comes to the role of independent directors. Further, as
noted by Cappelli et al. (2010), many independent directors in Indian companies do not necessarily
have monitoring on behalf of shareholders as their primary focus; rather, helping the company
management by providing strategic guidance and help is often viewed as a more important role of
such directors. This is in contrast to the U.S., where the most important role of independent
directors is viewed as providing the ‘‘checks and balances’’ monitoring role on behalf of the
shareholders.
Such differences related to the role of directors may also be driven by some legal differences.
Generally, the ‘‘business judgment’’ rule protects the independent directors of U.S. public
companies from monetary or criminal penalties; it is well recognized that such directors cannot be
held responsible for the day-to-day operations, since they only provide oversight over management.
In contrast, the Companies Act makes directors responsible for the accuracy of financial statements,
and a director can, in theory, go to jail for mundane corporate violations.15 Hence, at least in form
(if not substance), the directors in Indian companies have a more onerous responsibility for
financial reporting than do their counterparts in the U.S. This in turn brings the role of the
independent directors closer to that of management in India, unlike in the U.S.
Detailed Rules versus Implementation

There is a lot of form with respect to laws and procedures in India, but often the substance is
weak. For example, unlike in the U.S., the rules specify that the audit committee shall meet at least
four times a year. Furthermore, companies are also required to disclose in the annual report the
dates of the audit committee meetings, as well as the attendance records of the audit committee
members. Thus, in theory, there are more extensive disclosure requirements related to the
functioning of audit committees in India than in the U.S. However, here again, there is a gap
between form and substance. We illustrate this with two examples.
14
This led to SEBI examining Satyam’s donations to the ISB to see if there was any violation of corporate
governance norms ‘‘in spirit’’ (Moneycontrol 2009).
15
In a bizarre case, Field Marshall Manekshaw, who is one of only two five-star army generals in the history of
independent India and who was also the only general promoted to Field Marshall while in active service (and is
hence held in the highest esteem), was once threatened with jail time because one of the companies on which he
served as a director after retirement from the army had a check returned for insufficient funds.
Accounting Horizons
September 2012
TABLE 5
The Big 4 and the Indian Audit Market
Number of
Auditor BSE 500 Companies Percentage
Big 4 (including Indian affiliates)
Deloitte 60 19
Ernst & Young 36 11
KPMG 13 4
PwC 49 15
Total 158 49
Non-Big 4 165 51
All 323 100
This table provides details about the market share of the Big 4 in the market for external audit services in India as of
March 31, 2010. See Table 3 for details about the sample.
In the U.S., there are many Section 302 disclosures that identify material weaknesses in internal
control.16 In contrast, the CEO/CFO compliance certificates issued by Indian companies are
routine; examining the sample of 323 firms noted earlier, none of the firms had any internal control
weakness disclosure. Furthermore, in our extensive experience with annual reports of Indian public
companies, we have not come across any mention of weaknesses in internal control systems. It is
inconceivable that the quality of internal controls of Indian firms is so much more superior to those
of U.S. firms.
A second example involves whistleblowing. One of the roles of the audit committee, in the
U.S. and in India, includes ensuring that there is a mechanism for complaints by whistleblowers.
There are many instances in the U.S. where such a mechanism has resulted in exposing malfeasance
by management. However, there has not yet been a single story in the Indian media about a
whistleblower bringing to light material misdeeds by company management. The first author served
on the audit committee of a corporation with about $8 billion in total assets, and has never seen
such a complaint. In addition, discussions with some prominent directors serving on audit
committees (including one individual who serves on the board of more than a dozen of the largest
public companies in India) reveal that none of them has ever come across such an instance. Thus,
rules and procedures related to audit committees are yet another instance of form as opposed to
substance in the Indian context.
The Audit Market

As noted earlier, the ICAI does not permit international audit firms to practice auditing in India
using their international brand names (although the firms can practice consulting using such names).
This is one of the reasons why the Big 4 (i.e., their Indian associates) do not dominate the market
for audits of listed companies. This is true even when we focus only on the largest 500 firms listed
on the Bombay Stock Exchange. To shed some light on this issue, in Table 5 we provide details
about the identity of the auditor for the same sample of 323 firms, constituting some of the largest
16
Hermanson and Ye (2009) find that in many cases such Section 302 disclosures are lacking prior to the auditor
issuing an adverse Section 404 report; yet, they do find about 27 percent of companies with a subsequent adverse
Section 404 report had such pre-emptive Section 302 disclosures.
Accounting Horizons
September 2012
Bombay Stock Exchange-listed companies, the same set that is used for Table 3. Table 5 shows that
the Big 4 firms audit less than half of the sample firms.17 The Big 4 are less pervasive in an audit of
large listed firms in India than in developed countries and in some developing countries.18
There are multiple reasons for the relatively low presence of the Big 4 in India. First, in many
cases Indian audit firms have long associations with the founding families, and the relationship
between them is often as much personal as professional. In some cases, the auditors and the clients
even share common family roots. Hence, the founders and their descendants avoid changing
auditors in order to not offend the long-serving auditors and jeopardize other social relationships.
As a compromise, some companies that have a Big 4 firm have retained the existing non-Big 4 firm
as their auditor and ended up with two firms as joint auditors. Thus, as noted by Cappelli et al.
(2010) for some decisions by Indian managers, cultural compulsions may prevail over purely
economic considerations. Second, while companies with significant exposure to international
capital and product markets may consider paying a premium audit price that is typically associated
with a Big 4 firm, companies that have largely domestic operations have anecdotally noted that the
benefits from using a Big 4 firm do not exceed the audit fee premium. This implies that auditor
reputation has little meaningful effect on the cost of capital and other terms for raising debt or
equity in the domestic market. A related issue is that Indian companies and investors may not
perceive much difference between the audit quality of a Big 4 associate and a non-Big 4 firm. Since
the Big 4 associates are erstwhile Indian firms, the market may view their new affiliation as mere
name change with no major improvement in their systems, processes, and independence. It does not
help that an affiliate of a Big 4 firm audited Satyam, or that almost all of the firms involved in well-
publicized U.S. and U.K. scandals (e.g., Enron, WorldCom, Lehman Brothers, Barings Bank) with
coverage in the Indian media were also audited by other Big N firms.
Summary
With increasing globalization of the Indian economy, the country’s accounting, auditing, and
governance standards are being harmonized with the international standards. Indian accounting and
auditing standards are now aligned more closely than they were ten years ago with the standards
issued by international standard-setting organizations, such as the International Accounting
Standards Board (IASB) and the International Federation of Accountants (IFAC). While Indian
companies that access international capital and product markets may be keen to demonstrate their
commitment to high standards and go beyond the requirements of Indian regulations on disclosure
and governance, companies that operate largely in the domestic market may not feel these market
pressures. The growing influence of the Big 4 firms can be expected to lead to greater convergence
in the future. Nevertheless, social and cultural differences and disparities in the legal institutions
between India and the West are so significant that there will likely be continued divergence between
Indian and international reporting and governance practices in substance, even if not in form.
17
In fact, for several reasons the dominance of the Big 4 in an Indian corporate audit would be even more modest
than the data in Table 5 would suggest. First, the Big 4 firms have a much lower share of the audits of entities that
are majority government-owned; our sample excludes such entities. If we consider such companies, the audit
market share of the Big 4 would be even lower. Second, the Indian subsidiaries of multinational enterprises
usually engage their parent’s auditor, often a Big 4 firm. If we exclude such clients, the share of the Big 4 will be
even lower. Third, some of the clients of the Big 4 are listed in the U.S. and/or Europe, and their auditor selection
would have been influenced by market pressure and regulatory requirements. Finally, perhaps not surprisingly,
an even lower proportion of non-BSE 500 listed firms have a Big 4 firm as the auditor.
18
A measure of this difference is that in the U.S. the largest accounting firms audit 98 percent of the more than
1,500 largest public companies—those with annual revenues of more than $1 billion (General Accounting Office
2008).
Accounting Horizons
September 2012
WHAT NEXT?
Based on the preceding discussion, we hope to motivate research on governance and
accounting issues in India and other BRIIC nations. Next, we conclude our commentary by offering
several avenues for research, as well as selected insights for practice.
There is a growing recognition that governance approaches that are appropriate in
Anglo-Saxon or Western countries may not be necessarily enough or appropriate in settings such
as India. Though it is easy to import governance codes and mechanisms, their effectiveness depends
on the cultural and political environment within which businesses operate. The fact that Satyam
won global awards for governance procedures only serves to underscore the suggestion of Carcello
et al. (2011) that it is not sufficient to examine governance and monitoring mechanisms of
companies in non-Western countries through the lens of governance mechanisms that are
appropriate in Western economies characterized by widely dispersed ownership.
In India, and in some other Asian countries, founding families own a substantial proportion of
voting rights in many of the largest public companies. This raises some important questions for
future research. Many of the so-called independent directors in India and other Asian countries are
ex-bureaucrats, who are brought in as much for their connections and ability to facilitate issues
related to governmental regulations and red tape as for their administrative expertise. In their prior
careers as government officials, many such directors also had significant roles in setting government
policies that had significant impact on the operations of such companies. Should such persons be
called independent, particularly if monitoring management on behalf of shareholders is deemed to
be the primary role of independent directors? What is—and, perhaps more importantly, what should
be—the process by which independent directors are selected in such companies? At a more
fundamental level, as noted by Cappelli et al. (2010), many independent directors in India view
their primary role as providing strategic guidance to management, as opposed to being independent
monitors on behalf of shareholders. What should be the role of independent directors, and should
this vary depending on whether or not the founding family owns a substantial proportion of shares?
Another issue that is relevant in India, and elsewhere in Asia, is the separation between cash
flow rights and voting rights. Should the roles of the directors differ based on such differences?
More fundamentally, should there be regulatory changes to prevent such disparities between cash
flow rights and voting rights?
Independent directors constitute only one source of monitoring in a well-functioning capital
market. Analysts constitute another important source of external monitoring. The role of equity and
credit analysts in India leads to several questions. Are analysts too close to companies whose
performance they should be reporting on? What is the role of incentives in ensuring high quality
monitoring by analysts in markets like India, that are not as efficient as in the U.S.?
In the Anglo-Saxon economies, institutional investors and independent blockholders may
provide additional monitoring mechanisms. However, such monitoring does not appear to have
happened with Satyam. As on March 31, 2008, foreign investors held 67.6 percent of Satyam’s
shares (48.2 by foreign institutional investors and 19.4 percent by holders of American Depositary
Receipts), and Indian financial institutions held 13 percent.19 Yet, the Satyam fraud went
undetected for many years. Under what institutional settings can large blockholders and/or
institutional investors provide effective additional/alternative monitoring mechanisms?
Governments in general, and the regulatory and judicial authorities in particular, have an
important role in ensuring the smooth and efficient functioning of capital markets. The fact is that
even after three years there has been no finality about what happened in Satyam and whether the
19
S o u r c e : C o m p a n y fi l i n g ( h t t p : / / w w w . b s e i n d i a . c o m / s h a r e h o l d i n g / s h a r e h o l d i n g P a t t e r n . a s p ?
scripcd¼500376&qtrid¼57.00)
Accounting Horizons
September 2012
auditors were negligent and/or complicit in their dealings with Satyam. Given the pace of the
criminal cases and the disciplinary proceedings of the accounting regulator, it may take years before
we come to know what exactly led to the Satyam fraud, as well as the role of the auditors and others
in the monitoring process—were they simply negligent, or was there collusion? This contrasts
sharply with the speed in which investigations into the failure of Barings Bank, Enron, WorldCom,
and Lehman Brothers were concluded and remedial legal measures taken in the U.S. and U.K. The
failure of SEBI and the Ministry of Corporate Affairs to detect the fraud, or to move quickly in
meting out justice, despite their vast investigation and prosecution powers, is hard to understand.
Do these institutions lack the requisite technical resources, or do they lack the will to act?
India, as well as many other developing countries, often has the form but not the substance
when it comes to matters of law. Strict enforcement of laws and speedy punishment of the violators
are as much a part of the rule of law as the written law itself. What institutional and cultural factors
differentiate economies with varying degrees of substance, as opposed to form, in terms of various
rules and procedures?
The Satyam failure itself raises many questions: how did Satyam affect actual corporate
governance in India, particularly audit committees? In the immediate aftermath of the Satyam
failure, there were news stories suggesting an exodus from corporate boards, and particularly from
audit committees (Business Line 2009b). However, it is not clear to what extent there was an
incremental Satyam effect, beyond the normal director turnover. How did the composition of
boards in general, and audit committees in particular, change after Satyam? Did companies feel
pressure to increase the proportion of independent directors on the audit committee? Are directors
more likely to be paying greater attention to financial reporting and related matters post-Satyam?
Does this lead to fewer ‘‘busy-boarding’’ (i.e., the phenomenon of directors sitting on multiple
boards) directors? Are boards in general, and audit committees in particular, more diligent
post-Satyam?
The Satyam fiasco also raises significant questions about the quality of audits performed by the
Big 4 or their affiliates in non-U.S. settings in general, and in developing countries in particular. In
April 2011, the SEC and the PCAOB agreed to settlements with PwC’s Indian affiliates and
imposed penalties of $6 million and $1.5 million, respectively. Each is the largest ever imposed on
a foreign-based accounting firm in an enforcement action. The SEC (2011) noted that ‘‘audit firms
worldwide must take seriously their critical gate-keeping duties’’ irrespective of the location of the
client. There are some fundamental questions about global accounting networks. Are the foreign
operations part of the Big 4 and other similar networks, or are the firms only a part of a loose
federation sharing a common franchise? What are the costs and benefits—to clients, financial
statement users, and the auditors—from such networks?
One interesting fact to note is that in the aftermath of Satyam, there were significant changes in
the operations of PwC in India. A cadre of PwC executives was brought in from outside India,
including the new chairman of PwC India, to provide greater oversight over Indian operations
(Lakshman 2009). In addition, PwC set up an advisory council for its Indian operations and
reorganized PwC India (Ramsurya 2011). PwC India appears to have conceded the SEC’s
jurisdiction over it by paying a fine. In contrast, Deloitte Shanghai has questioned the authority of
the SEC and PCAOB to take action against it in connection with its investigation into the
accounting practices of Longtop Financial Technologies, a Chinese company whose ADSs are
listed in the NYSE. Will other affiliates of the Big 4 and/or regulatory authorities in other countries
resist similar ‘‘intervention’’ by outsiders? The SEC and the PCAOB are engaged in discussions
with the authorities in China on lifting barriers for inspectors to review auditors of U.S.-listed
companies in China in the wake of a number of Chinese companies disclosing auditor resignations
or accounting irregularities (Bloomberg 2012).
Accounting Horizons
September 2012
The Big 4 trumpet the fact that they have global standards, but to what extent does their audit
quality vary across countries? What internal mechanisms do the Big 4 have to ensure that their units
or affiliates in different countries can provide high-quality service in different settings, with
minimal variance? Given recent troubles faced by the PCAOB in inspections of foreign audit firms,
these questions are important issues that will only become more pronounced in the future.
REFERENCES
Bloomberg. 2012. CFTC rule votes, EU payments industry, PCAOB: Compliance. Available at: http://
www.bloomberg.com/news/2012-01-12/ctfc-rule-votes-eu-payments-industry-pcaob-budget-
compliance.html
Business Line. 2009a. Satyam spooks market. (January 8). Available at: http://www.thehindubusinessline.
com/todays-paper/article1039283.ece
Business Line. 2009b. Satyam effect: 70 firms report director exit. (January 23). Available at: http://www.
thehindubusinessline.com/todays-paper/article1040388.ece
Cappelli, P., H. Singh, J. Singh, and M. Useem. 2010. The India way: Lessons for the U.S. Academy of
Management Perspectives 24 (2): 6–24.
Carcello, J. V., D. R. Hermanson, and Z. Ye. 2011. Corporate governance research in accounting and
auditing: Insights, practice implications, and future research directions. Auditing: A Journal of
Practice & Theory 30 (3): 1–31.
Carson, E. 2009. Industry specialization by global audit firm networks. The Accounting Review 84 (2): 355–
382.
Claessens, S., S. Djankov, and L. Lang. 2000. The separation of ownership and control in East Asian
corporations. Journal of Financial Economics 58 (1-2): 81–112.
Financial Times. 2009. Satyam scandalises. (January 8). Available at: http://www.ft.com/cms/s/0/0f75a660-
ddad-11dd-87dc-000077b07658.html
General Accounting Office (GAO). 2008. Audits of Public Companies: Continued Concentration in Audit
Market for Large Public Companies Does Not Call for Immediate Action. GAO-08-163. Washington,
D.C.: GPO.
Hermanson, D., and Z. Ye. 2009. Why do some accelerated filers with SOX Section 404 material
weaknesses provide early warning under Section 302? Auditing: A Journal of Practice & Theory 28
(2): 247–271.
Kripalani, M. 2009. India’s Madoff? Satyam scandal rocks outsourcing industry. BusinessWeek (January 7).
Available at: http://www.businessweek.com/globalbiz/content/jan2009/gb2009017_807784.htm
Lakshman, N. 2009. PwC India struggles to overcome Satyam scandal. BusinessWeek (March 30).
Available at: http://www.businessweek.com/globalbiz/content/mar2009/gb20090330_516042.htm
Leahy, J. 2009. $1 bn fraud at India IT group. Financial Times (January 8): 1.
Moneycontrol. 2009. SEBI to probe if Satyam, ISB violated corp governance norms. Available at: http://
www.moneycontrol.com/news/business/sebi-to-probe-if-satyam-isb-violated-corp-governance-
norms_374861.html
Ramsurya, M. 2011. PricewaterhouseCoopers India grappling with people issues even after two years of the
Rs 7,000-crore Satyam fraud case. The Economic Times (August 22). Available at: http://articles.
economictimes.indiatimes.com/2011-08-22/news/29915148_1_pwc-india-satyam-fraud-case-pw-
india
Securities and Exchange Commission (SEC). 2011. SEC charges India-based affiliates of PWC for role in
Satyam accounting fraud. Available at: http://www.sec.gov/news/press/2011/2011-82.htm
Srivats, K. R. 2011. SEBI keen to gain control over corporate governance norms. Business Line (April 14).
Available at: http://www.thehindubusinessline.com/todays-paper/tp-markets/article1694887.ece
Wall Street Journal Asia. 2009. Satyam: Sanskrit for ‘Enron.’ (January 9). Available at: http://online.wsj.
com/article/SB123143655097064873.html
Accounting Horizons
September 2012
Tata: the biggest boardroom coup
Goparaju Purna Sudhakar
Tata Group history and legacy Goparaju Purna Sudhakar

is Faculty Member at The
Be it JRD Tata or Ratan Tata. We always saw the Tata Group as a rather different Indian
ICFAI University Group,
enterprise, one that stood for decency, fairness, conscience, honesty and even social
Hyderabad, India.
transformation (Sanghi, 2016) – Ashwin Sanghi, (Quartz India, November 16, 2016).
On October 24, 2016, according to The Economic Times, the Tata Sons board meeting was
supposed to discuss the corporate governance framework, “What happened though was
very different: the points never came up for discussion, and instead, Cyrus Mistry,
Chairman of Tata Sons, was unceremoniously ousted” (Moneylife, 2016). As of October 31,
2016, Cyrus Mistry began vacating the iconic Bombay house, which is the headquarters of
Tata group (Mishra, 2016). He moved into Bombay House in November 2011, as vice
chairman of the group and to be the successor of Ratan Tata for Chairmanship, a year later.
Mistry moved to Bombay house with a dream of a long haul of three decades till retirement
at age 72. However, his dreams came to halt with the replacement of him by Ratan Tata as
interim chairman of Tata Group on October 24, 2016.
Tata Group is a multinational conglomerate based in Mumbai, India, founded in 1868 by
Jamshedji Tata. It gained a global reputation for the series of foreign acquisitions it made
over a long period. As of 2016, Tata Group is into airlines, automotive, chemicals, financial
services, software consulting, electrical distribution, engineering services, locomotives,
consumer goods, steel, telecommunications, health care, real estate, defence and
aerospace. Ratan Tata who hails from the Tata family was the chairman of the group
between 1991 and 2012. Cyrus Mistry was the chairman of the group from 2012 till his
ouster on October 24, 2016. Tata Group is a salt to software conglomerate. They make from
salt up to Jaguar and Land Rover cars[1].
Tata Group ($103.51bn revenues in FY2016) employs around 660,800 persons across the
world as on December 2016[2] (Exhibit 1). As on September 13, 2016, 70 per cent of the
Tata group’s revenues come from overseas businesses (IANS, 2016a). They do business
in all five continents. They are the group who launched the cheapest car of the world “Tata
Nano” for Rs 1,00,000 ($1500) in 2008 by their venture Tata Motors.
Tata Group has 29 publicly listed companies with a combined market capitalization of
$120bn (Exhibit 2). Tata Sons is the holding company of the group companies and Tata
Trusts are the promoters having shares in Tata Sons (Exhibit 3). Tata Sons is not a publicly
listed company. In addition to Tata Sons stake in group companies, one group company
Disclaimer. This case is written
has a stake in other group companies leading to a complex governing structure for the solely for educational
group. The evolution of Tata Group is presented in Exhibit 4. On October 24, 2016, Mistry purposes and is not intended
to represent successful or
would like to strengthen five different layers of proposed corporate governance structure unsuccessful managerial
(Exhibit 5) for Tata Group with clear roles, responsibilities and authorities. decision-making. The authors
may have disguised names;
financial and other
As of November 8, 2016, Tata Sons shareholding pattern included Pallonji Mistry’s (Father recognizable information to
of Cyrus Mistry) group Shapoorji Pallonji (Shapoorji Pallonji Group, 2016)(18 per cent), Tata protect confidentiality.
DOI 10.1108/EEMCS-03-2017-0041 VOL. 8 NO. 3 2018, pp. 1-24, © Emerald Publishing Limited, ISSN 2045-0621 EMERALD EMERGING MARKETS CASE STUDIES PAGE 1
Trusts (66 per cent) and various Tata Group companies (16 per cent) (Exhibit 6). Tata Sons
own 33 to 74 per cent in most of the Tata Group’s 29 publicly listed companies (Doshi,
2016).
Tata Group performance before Mistry

Tata’s expansionist strategy increased the group’s revenues from around $6 billion to $100
billion over two decades but saw group debt ballooning (ETB, 2016a) – The Economic Times,
October 25, 2016.
During Ratan Tata’s regime between 1991 and 2012, group revenues have grown at
Compound Annual Growth Rate (CAGR) of 19.2 per cent (Dubey et al., 2016). The group
revenues have grown phenomenally between 2001 and 2010 with major global acquisitions
such as Corus and Jaguar Land Rover and big buyouts in beverages. However, Corus
turned out to be a bitter one with the global economic meltdown in 2008. Ratan Tata’s
expansionist strategies increased group revenues from $6bn to $100bn in two decades
along with acquiring major debt (ETB, 2016a).
In September 2016, Cyrus Mistry, while speaking on corporate governance at Tata Group,
said ”keeping with Tata ethos, we are fully committed to maintain the highest standards of
ethics and governance in the conduct of business by our enterprises”.
On October 24, 2016, Mistry was supposed to present the corporate governance
document before the board of Tata Sons in line with improving the corporate governance
practices. On October 24, 2016, Mistry proposed a corporate governance structure that
clearly defines the role of board of directors of Tata Sons including reviewing of holding
company’s strategic plan periodically and reviewing the business plans yearly.
The business plan review included examining the cash flows, strategies, profit and loss,
opportunities and risks along with approving the acquisitions and joint ventures in line with
the government regulations. He also made similar plans for group companies along with
defining the role of board of directors of Tata sons. As of October, 2016, one of the major
proposals of Mistry was to review the funding requirements of group companies.
Tata Group performance at Mistry ouster

The Tatas are such a well reputed group and the Tata brand stands for ethics, values, elegance,
grace, integrity and a bold vision. Somehow I believe that the matter has not been handled with
the same elegance and grace which is known as the “Tata way of management”. This has been
somewhat disappointing because one is also not sure of the reasons behind it (ETN, 2016a) –
Harsh Goenka, Chairman, RPG Enterprises (The Economic Times, November 04, 2016).
Cyrus Mistry was in chairmanship of Tata Group for nearly four years from December 2012
till October 2016. On November 23, 2011, he was selected to be the vice chairman of the
group to be groomed by Ratan Tata, as his successor. Till December 2012, he was
personally groomed and mentored by Ratan Tata. On December 28, 2012, he took over the
Tata Group as its chairman with the retirement of Ratan Tata. Previously, Cyrus was part of
the Tata’s selection committee to lookout for a chairman. However, the selection committee
selected him as their chairman. Mistry actually came to the Tata Group in 2006 as Tata
Sons’ one of the directors, with his father Pallonji Mistry’s retirement from board.
During Mistry’s regime (2013-2016), Tata Group has experienced Compound Annual
Growth Rate (CARG) of 8.5 per cent, which was half of that compared with Ratan Tata’s
time CAGR. However, this lower growth rate was attributed to a slowdown in China and a
global economic meltdown because of which Tata Steel and Tata Motors could not make
as expected. Mistry also attributed this slow growth rate to Ratan Tata’s era costly mistakes,
which could not give enough freedom to act fast. However, the market capitalization of the
group companies have zoomed from Rs 4,34,000 crore in March 2012 to Rs 7,59,000 crore
in March 2016 (Dubey et al., 2016). According to Mistry, Tata Group’s net worth increased
PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 8 NO. 3 2018

from Rs 26,000 crore in FY2011 to Rs 42,000 crore in FY2016 (DHNS, 2016). Investors felt
that Mistry was doing reasonably well (Exhibit 7). For the same duration, BSE SENSEX did
not grow at the same rate as Tata Group companies have grown.
On September 13, 2016, Cyrus Mistry, Chairman, Tata Group, while talking about the
speed and agility they were looking for their group of organizations, he said “We are
building the Tata group of next 150 years” (IANS, 2016a). As on September 13, 2016, Mistry
was optimistic about the Tata Group’s future acquisitions both within and outside country
towards the organic growth of the group. Tata Group has invested Rs 4,15,000 crore on
capital expenditure over the past decade, which includes Rs 1,70,000 crore investments
during the past three years, that is, in Mistry’s regime (IANS, 2016a). (Exhibit 8). According
to Mistry, during 2013-2016, Tata Group’s operating cash flows grow by 30 per cent CAGR.
As on September 13, 2016, Tatas were incubating three companies such as Tata CLiQ, an
e-commerce platform; Tata iQ, an omni channel marketplace; and Tata Digital Health, a
platform for health care in India. In September 2016, while talking about the tough
decisions, they were taking on group companies, he said “We would then evaluate group
leadership, strategy and operations of each business before we take any decision to exit”.
In September, 2016, Mistry appreciated the Ratan Tata’s vision in early 2000s to take up the
group as global entity and created a strong platform for the group.
As of October 2016, the Tata Group was not happy with Mistry’s decisions such as selling
Tata Steel European unit, dealing with Tata DOCOMO[3] legal battle, and the slashed
dividend payments to holding company Tata sons. NTT DOCOMO[4] entered into joint
venture with Tata Teleservices in 2008 with investment of $2.2bn. They entered with clear
performance goals and if these performance goals were not met, Tata Group had to pay
them $1.1bn. Tata DOCOMO did not do well and share prices went down over a period,
and the Government of India and Reserve Bank of India did not allow Tatas to payback.
NTT DOCOMO approached the arbitration council in the UK and won the award worth
$1bn. The way Mistry dealt with the case was not to the satisfaction of the promoter.
It took two years for Mistry to hire Guenter Butschek as the head of Tata Motors[5] after the
sudden death of its previous head Karl Slym in January 2014. This was also a hire made to
the Tata Sons’ board.
As on November 19, 2016, TCS[6] and Jaguar Land Rover businesses were generating
significant profits and dividends for the group; however, the five businesses of the group
such as motors, steel, power, hotels and telecommunications arms were making them to
lose money or not producing good returns over the cash invested. Tata’s Nano car
business was making losses. Tata Chemicals[7] reported net profits of Rs 293 crore for the
September 2016 quarter with consolidated revenues of Rs 3,496 crore (Pandey, 2016) for
the year ending September 2016.
According to Mistry, domestic business of Tata Motors was in the path of turnaround as on
October, 2016. The October 24, 2016’s ouster of Mistry was attributed to the repeated
departure of Mistry from the Tata group’s culture, ethos and values (ETB, 2016b). As on
March 2016, Tata Group’s gross debt was at over Rs 3 lakh crore and net debt was at over
Rs 2 lakh crore (ETB, 2016a). However, with Mistry’s appointed CEO of Indian Hotels[8]
Rakesh Sharma on September 01, 2014, they could turnaround Indian Hotels by reporting
reduced net losses of Rs 26.7 crore for September 2016 quarter to compare with Rs 151.9
crore loss of September 2015 quarter (ETB, 2016c). Sharma focused on cost control and
enhanced customer engagement. With this consolidated loss of Indian Hotels for FY2016
was at Rs. 60.5 crore to compare with FY2014 loss of Rs 553 crore.
Tata Steel[9] reported consolidated increased loss of Rs 3,183 crore for year ending
September 2016 to compare with consolidated loss of Rs 316.91 crore for the year ending
September 2015 (PTI, 2016a). Revenues of Tata Steel went down by 6 per cent for
the September 2016 quarter to compare with same quarter of previous year.
VOL. 8 NO. 3 2018 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3

Legacy hotspots
Clearly, the great reputation of the group would be damaged (IANS, 2016b) – Adi Godrej,
Chairman, Godrej Group (Business Standard, October 26, 2016).
In an email sent to Tata Sons’ board of directors, on October 25, 2016, Cyrus Mistry said
that the losses in “legacy hotspots” could result into writedown on Rs 1.18 lakh crore
($18bn) to the group, over a period (PTI, 2016b). Mistry expressed that losses at Indian
Hotels, Tata Motors, Tata Steel Europe, Tata Power Mundra and Tata Teleservices have
reached alarming propositions. These companies are nothing but the five legacy hotspots
according to Mistry. The investment into these legacy hotspots was around $29bn.
According to Mistry, on October 27, 2016, if the reappraisal of the conglomerate was
necessary, $26bn of the net worth of the conglomerate would be wiped out (Bloomberg,
2016). The entire net worth of the Indian Hotels was wiped out between 2013 and 2016.
According to the Mistry’s email to Tata Sons’ directors, on October 25, 2016, “the capital
deployed in these companies has risen to Rs 1.96 lakh crore due to operational losses,
interest and capex. The figure is close to the net worth of the group which is at Rs 1.74 lakh
crore”.
Mistry blamed Ratan Tata for some of the legacy issues the group faces and which were
done during the tenure of Ratan Tata (Shah and Choudhury, 2016). According to Cyrus
Mistry, Tata Nano project was a burden for the group; it was kept only for emotional
reasons. The Tata Nano project consistently lost money. In an October 2016, letter, Mistry
said “Any turnaround plan for Tata Nano required Tata Motors to shut it down” (Dalal, 2016).
As of December 20, 2016, Mistry resigned from chairmanship of the six Tata Group
companies and on December 21, 2016, he took the legal route and filed a suit with the
National Company Law Tribunal (NCLT) against Tata Sons board and Tata Trusts. In the
petition, he mentioned the legacy hotspots such as the Corus acquisition, Tata Nano car
project, DOCOMO arbitration and about Tata Group investments in the aviation sector. In
the petition, he wanted NCLT to direct Tata Group not to dilute shareholding pattern in Tata
Sons, which results in affecting his family firms, and not to remove Mistry as director of Tata
Sons. He also mentioned in the petition that Tata Group mismanagement was affecting his
family firms, his illegal removal from chairmanship, Tata acting like proprietorship firm and
directors of Tata sons failed to discharge their fiduciary duties.
Major trouble makers

Mr Tata created the mess and it is up to him to resolve it[10] – The Economist, November 19,
2016.
On November 01, 2016, Live Mint while reporting on the separation required between
ownership and control of an Indian corporation, said “This time, the disappointment is all
the more because the reputation of the Tatas is at stake. The Tatas are an icon of Indian
business, supposed to represent its best practices”
(Chakravarthy, 2016).
In an October 2016 letter, Cyrus Mistry while giving an example of power centers without
any responsibility and accountability in corporate governance, said “once, the trust
directors (Nitin Nohria and Vijay Singh) had to leave a Tata Sons board meeting in progress
for almost an hour, keeping the rest of the board waiting, in order to obtain instructions from
Mr. Tata” (Chakravarthy, 2016). In the same letter, he quoted the fraudulent transactions
that happened worth Rs 22 crore in the Air Asia[11] deal, by saying “I had made my
objection known on the airline ventures (Air Asia)”. He continued by saying in the letter “I
was pushed into the position of a ‘Lame Duck’ Chairman” (Dalal, 2016). According to
Mistry, Tata groups investments in Vistara[12] and Air Asia were also troubled ones. These

investments were done because of Tata’s “passion for the airlines sector” (Dubey et al.,
2016).
As of October 26, 2016, based on Cyrus Mistry’s letter to its board, NSE and BSE asked
Tata Motors, Indian Hotels, Tata Steel, Tata Power and Tata Teleservices to provide details
on what Mistry has raised. Stock Exchange Board of India (SEBI) was also believed to be
looking into the matter where Mistry reported financial irregularities, transparency issues
and corporate governance issues. Observers were asking why Mistry raised these issues
now and why did not raise these issues with the board when he was in position (TG, 2016).
Mistry also raised questions regarding the favours done by Tata group to Mr. C.
Sivasankaran of Siva Industries and Holdings Ltd., which Ratan Tata denied on October 8,
2013, by saying “He (Shiva) wanted to invest in TTSL (Tata Teleservices Ltd) because he
believed the telecom sector was fast-growing and he could sell his stake at a sizeable
profit” (BL, 2016). There were allegations related to the issue of Rs 650 crores loan to Siva
by a bank in which Tata Group gave the guarantee.
The other troubles behind the Mistry–Tata saga include, Mistry not keeping Tata in the loop
in major decisions, no appointment of group CFO for over three years and the sale of Tata
Steel Europe’s acquisition of Welspun, and Tata trusts upset with Mistry’s functioning for
past 12 to 18 months before October 24, 2016. Tata Sons was unhappy with Mistry’s vision
and direction. Another trouble maker was the conglomerate revenues for FY2016 have
fallen 4.8 per cent to $103.5bn compared with $108.78bn in FY2015 (ETB, 2016a). In the
past four years, sales plunged, debt has risen and return on equity has shrunk.
In October 2016, Mistry ignored the suggestion of some of the members of Tata Trusts to
sell off 5 per cent stake in TCS to protect some of the troubled businesses. Tata Sons held
a 74 per cent stake in TCS and a 5 per cent stake dilution could have generated $3bn
(around Rs 20,000 crore) (Kurian and Zacharish, 2016). The Tata Sons holdings in TCS
were worth $32bn, which was considered a lifeline for the Tata group. TCS dividends were
accounted for 76 per cent of the Tata Sons revenues in Ratan Tata’s regime; this share shot
up to 91 per cent of Tata Sons revenues in 2015-2016 in the Mistry regime.
Corporate governance matters

I have to say that the board of directors did not cover itself with glory.. [. . .] To replace your
Chairman without so much as a word of explanation and without affording him an opportunity to
defend itself [. . .] [. . .] .must be unique in the annals of corporate history (Dubey et al., 2016)
– Cyrus Mistry, Ouster Chairman, Tata Sons (India Today, October 27, 2016).
On September 13, 2016, Cyrus Mistry, while speaking about corporate governance said
that he wanted the board of directors of Tata Sons to review the funding requirements of
group companies instead of just approving them. This would allow the holding company to
take a decision on whether to pump the money into group company. He also suggested the
guidelines to review the group companies. Mr Mistry also would like to fix the role of the
chairman and independent directors of group companies in addition to finalizing their
responsibilities. This elaborated strategy was not discussed in the Tata Sons board
meeting; however, he was shown the door. According to the Indian Express (November 8,
2016), the corporate governance document prepared by Mistry, “outlined the rules of
engagement between the Tata Trust, Tata Sons, Tata Independent boards and operating
companies”.
On October 25, 2016, that is, a day after Cyrus Mistry’s removal, he sent a mail to Tata Sons
board and Tata Trusts, with allegations against the Tata Group, its predecessor, Ratan
Tata, related to fraudulent transactions, conflict of interest, unethical practices and level of
corporate governance in $103bn conglomerate. In the mail he said, there is “total lack of
corporate governance” related to the investments made by his predecessor during his
tenure. He accused the board of Tata Sons for replacing him without even giving the

opportunity to hear his explanation. Mistry was informed about his replacement just minutes
before the board meeting by Ratan Tata and Nitin Nohria on October 24, 2016. He was
replaced by his predecessor and promoter Ratan Tata as interim chairman for four months.
Tata Sons attributed Mistry’s removal towards poor performance, breach of trust,
non-compliance with Tata cultural issues and values, eroding shareholder value and
reducing the role of Tata sons (Reuters, 2016).
On November 13, 2016, Tata Group called for shareholder meetings to vote to ouster Mistry
from Tata Motors, Tata Steel, TCS, Indian Hotels and Tata Chemicals chairmanship.
Mistry’s removal also involved an EGM (Extraordinary General Meeting) at the group
companies based on the shareholders’ request. Under section 169 of Companies Act,
2013, a chairman can be removed by simple majority of shareholders present at the
meeting. According to Indian Companies Law, shareholders having controlling stake can
fire the board of directors. Tata Sons has a 73.33 per cent stake in TCS, easing their way
to ouster Mistry from the TCS chairmanship.
On October 29, 2016, Vineet Nayar, Former VC and CEO of HCL Technologies[13] while
speaking on the Tata–Mistry row said “India has been built around such family businesses
and I am a big supporter of this model. Thus we definitely need to preserve that
strength and add to it a governance layer so that it continues to deliver results for all
stakeholders and the trust in such instructions grows with time” (GA, 2016). In November
2016, in a letter to employees of Tata group companies on replacement of chairman, Ratan
Tata said “The decision to change the leadership of Tata Sons was a well-considered and
serious one for its board members. This difficult decision, made after careful and thoughtful
deliberation, is one the board believes was absolutely necessary for the future success of
the Tata group”.
On November 08, 2016, according to the corporate governance firm Institutional Investors
Advisory Services (IIAS), it is up to the boards of individual group companies to decide on
the fate of Cyrus Mistry as their chairman on their boards. In October, 2016, Mistry was
chairman of Tata Group companies such as TCS, Tata Motors, Tata Steel, Tata Power,
Indian Hotels, Tata Chemicals and Tata Global Beverages. As of November 8, 2016,
LIC[14], GIC[15] and New India Assurance company[16] have a minority shareholding in
these companies. To remove Mistry from chairmanship of these companies, Tata Group
requires support of these minority shareholding companies.
On November 8, 2016, mutual fund houses such as HDFC Mutual fund, ICICI Prudential
MF, Reliance Mutual Fund, SBI MF and foreign institutional investors such as Abu Dhabi
Investments, Government of Singapore and Global Pension Fund Global have ownership
ranging from 1 to 13 per cent in these group companies, which can decide the fate of Mistry
as chairman of those companies.
In November 2016, Indian Hotels board expressed their full support for Cyrus Mistry as their
chairman. The independent directors of Indian Hotels such as Deepak Parekh, Chairman,
HDFC Ltd[17]; Nusli Wadia, Chairman, Wadia Group[18]; and Nadir Godrej, Managing
Director, Godrej Industries[19] expressed their confidence and support publicly to Mistry.
On November 8, 2016, at Sixth Forbes India Leadership Awards function in Mumbai, M.
Damodaran, Former Chairman, SEBI, while speaking in general about corporate
governance said that when you marry two sentences said by Mahatma Gandhi in two
different occasions, the best meaning of corporate governance can be arrived. Those
Mahatma Gandhi quotes were “Business is Trust, business stands for trust” and “The ends
do not justify the means”.
On November 7, 2016, Mamata Binani, President, Institute of Company Secretaries of India
(ICSI), while talking about corporate governance norms were not breached by Tata Group,
she said “We have been following the development, which is in the public domain. There

has not been a violation of secretarial standards on board meeting. What we understand is
that there is both sides to the story” (Moitra, 2016).
On November 13, Cyrus Mistry’s office released a statement stating that Mistry tried to form
a corporate governance framework that balances interests of promoters, shareholders
without impacting the independence of group companies. This statement has come the
next day to Tata Group’s statement that said Mistry was trying to take over Indian Hotels
with the help of independent directors. Indian Hotels is part of $103bn.
As of November 14, 2016, the calls of EGM at Tata Group companies put the ball in the
court of shareholders. Except TCS, institutional investors were the key players in this saga.
Even after 2013, 2015 corporate governance reforms in India, promoters’ powers seemed
to be stronger. Independent directors can be outweighed by the influence of promoters. As
on November 14, 2016, Tata Group called for EGM at Indian Hotels, Tata Motors and Tata
Chemicals to get shareholder support to ouster Cyrys Mistry. As on November 7, 2016, Tata
Steel and Tata Chemicals voted to keep Mistry as their chairman. However, as on
November 14, 2016, Tata Motors avoided commenting on Mistry’s future as chairman of
Tata Motors. Tata Motors, which owns British car maker Jaguar Land Rover reported a net
profit worth Rs 8.48 billion ($125m) for Q2 2016-2017.
On November 17, 2016, in an attempt to ouster Mr Mistry from group companies’
chairmanship, board of directors of Indian Hotels backed Cyrus Mistry, Tata Global
Beverages removed Mistry as Chairman, and directors of Tata Motors sat on the fence. On
November, 04, 2016, the independent directors of Indian Hotel’s expressed their full
confidence “unanimously” in the leadership of Cyrus Mistry because of two continuous
quarters’ performance of Indian Hotels in the direction of its turnaround. According to Live
Mint, dated November 17, 2016, corporate governance in Indian companies was
complicated because of the complex structure of Indian companies such as holding
companies, investment companies and operating companies having a stake in one
another. In November 2016, SEBI Chairman, UK Sinha, while speaking at a CII
(Confederation of Indian Industry) conference in Mumbai said “I don’t want to comment on
any particular company or group. But the independent directors have the fiduciary duty to
perform and that they have their loyalty and obligation to all their shareholders” (ENSEB,
2016). He also said that independent directors take care of the interests of the shareholders
and also follow the SEBI guidelines. He continued by saying “Corporate governance is very
high on our agenda. A number of measures have been taken in last four years” and said
it is time India has to look at global corporate governance practices to improve upon.
Corporate governance in India has evolved over the past two decades with the enactment
of the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015. On November 18, 2016, it was unlikely that Mistry may legally challenge
his removal; instead, he may focus on corporate governance, irregularities and
professional running at the Tata Group. On November 18, 2016, a spokesman of Mistry said
that the issue was not about becoming or remaining as Chairman of Tata Sons, but it is
about the corporate governance and ensuring that the Tata Group companies are run
professionally and at the best interests of shareholders. As of November 18, 2016, Mistry
has been removed from TCS and Tata Global Beverages boards as chairman, and he still
continued on boards of Tata Steel, Tata Motors and Tata Sons. Tata Sons called for
shareholder meeting to ouster Mistry. By December 21, 2016, Mistry took the matter to the
legal grounds and filed a suit with the National Company Law Tribunal (NCLT).
Corporate governance across the world

What’s happened to Cyrus is a “Mistry”! (BSWT, 2016) – – – - Harsh Goenka (@hvgoenka),
Chairman, RPG Enterprises (on Twitter, October 24, 2016).

This is not the first time; corporate governance has been questioned in the world. Way back
in 1992, when legendary JRD Tata was alive, the group experienced the tussle between the
man manager Russi Mody, managing director JJ Rani and the Ratan Tata. In 1992, Tata
Group sacked Russi Mody from the chairmanship of Tata Steel (TISCO) in Jamshedpur.
The chairmanship had to transition to Ratan Tata, who is the successor of JRD Tata. Next
day, the news headlines were “India’s best man-manager sacked” (FP, 2016). However, in
the long run, this move turned out to be a profitable one to the Tata group. Russi Mody
himself praised Ratan Tata for the phenomenal growth of Tata Steel.
In 2002, Enron, US energy major’s fraudulent financial deals were not questioned by the
board. This led to the shutdown of Enron. Based on this experience, the USA introduced the
Sarbanes–Oxley Act in 2012 to further strengthen corporate governance in organizations.
The reason for the 2008 collapse of Lehman Brothers was eight of its directors did not know
anything about finance except their own fields. Similarly insurance major AIG almost
reached collapse. The US Government provided a bailout package worth $180bn and
replaced the CEO and board of directors.
Way back in 2008, Indian cash-rich software major Satyam Computer Services[20] was
merged in promoter’s infrastructure company Maytas. Later accounting audits found that
the documents were forged and asset values were inflated. The board members failed to
ask tough questions. In previous years, Satyam’s Ramalinga Raju won the Golden Peacock
award for his company on corporate governance. Later, he revealed Rs 14,000 crore
accounting fraud of his company (Kamath, 2016). Sometime back, Infosys was also in the
news for a sexual harassment case against its senior executive Phaneesh Murthy.
Cognizant[21] was in news for its president quitting on bribery charges for setting up of its
development center in India.
In 2013, Daiichi Sankyo, a Japanese company acquired Indian Pharma major Ranbaxy
without knowing that Ranbaxy was undergoing critical US FDA investigations. Later, Daiichi
Sankyo was not able to come out of the problems, and it sold off Ranbaxy at a loss. In 2015,
Diageo, after acquiring India’s United Spirits alleged that its promoter Vijay Mallya diverted
huge amounts of funds from the firm. Its board of directors did not raise such questions
because of Vijay Mallya’s overarching persona. This was because many promoters in India
keep their relatives and close friends on the board of directors, leading to the board being
reluctant to ask tough questions.
What did independent directors do?

Independent directors have got drawn into personality conflict and may have compromised the
shareholder’s interest (Mohil and Upadhyay, 2016) – Live Mint (November 18, 2016).
In his letter dated October 25, 2016, Mistry stated that two of the three independent
directors left the board meeting for an hour to meet Ratan Tata, holding the board meeting
up for an hour. It then followed with two of the three independent directors on the committee
voted for his removal. Despite nomination and remuneration committee of Tata Sons lauded
the performance of Cyrus Mistry in late 2016, majority of independent directors voted for
Mistry’s ouster (Mohan, 2016). Independent directors were supposed to safe guard the
interests of minority shareholders keeping in balance with interests of promoters. However,
they toed the line of promoter shareholder.
Meanwhile, on November 14, 2017, at Indian Hotels, independent directors defied the
dominant shareholder and unanimously expressed their support to Cyrus Mistry as Indian
Hotels Chairman. As of December 23, 2016, Tata Sons was trying to ouster another
independent director Nusli Wadia, who supported Mistry publicly. He was already removed
from the board of Tata Steel on December 23, 2016. This decision raised a question, how
independent were the independent directors in corporate India?

Impact on shareholder wealth
In this battle, the real losers are the retail shareholders whose wealth has steadily declined
(Varma, 2016) – Satvik Varma, Harvard Law School Graduate & Practicing Corporate
Commercial Lawyer, New Delhi (The Financial Express, November 18, 2016).
In October, 2016, Tata Group companies accounted for over 7 per cent of the Indian listed
companies market capitalization on stock exchanges (GA, 2016). That is the reason
minority stakeholders might look at regulations more carefully. According to November 4,
2016, The Economic Times, Tata group comprises of 29 listed companies with combined
market capitalization of $120bn (Barman, 2016).
Tata Group’s October 24, 2016, news of Cyrus Mistry’s replacement as Chairman of Tata
Sons, Tata Group stocks experienced the pounding. On October 25, 2016, at 10.40 a.m.,
S&P BSE Sensex was down by 133 points to 28,047 and Nifty50 was down by 33 points to
8,676 (Business Standard, 2016). Tata Group companies shares were experiencing a fall
of up to 4 per cent. As of October 27, 2016, Indian Hotels share price lost of nearly 8 per
cent. The Tata Steel share price was down by 1.53 per cent and was trading at Rs 392.75
on October 27, 2016. BSE Sensex was down 77 points to 27,760 on October 27, 2016
morning session.
Then, 48 h after Cyrus Mistry’s ouster from Tata Sons Chairmanship (on October 26, 2016),
still the reason to ouster Mistry remained a mystery (Dalal, 2016). The Investors of all Tata
group companies remained in the dark and were confused about what was going on.
Serious questions popped up about the way the group was being run. While good
governance norms and rules are to be followed, and details are to be submitted to stock
exchanges by listed companies, this is not applicable to Tata Sons, which is an unlisted
entity. However, by keeping the millions of investors in mind, as on October 26, 2016, Mr
Ratan Tata wrote a letter explaining his return as interim chairman to Tata Sons to the Prime
Minister of India.
On October 26, 2016, Ratan Tata met the listed companies group heads and CEOs and
assured them of the continuity. He told them that he was proud of them and needed to give
the same assurance to all investors. However, on October 26, 2016, shareholders and
investors were keeping a close watch on the price movement and trading activities of two
dozen listed companies of Tata Group. According to the International Monetary Fund
(IMF)’s global financial stability report released in October 2016, India’s protection score of
minority shareholders went down between 2006 and 2014 (Mampatta, 2016) (Exhibit 9).
However, according to The World Bank report on “Doing Business 2017”, released on
October 25, 2016, corporate governance norms in India have improved a lot in the past
decade. The investors’ protection and minority rights protection have improved significantly
over the past decade (Exhibit 10). This indicates that the latest drop in India’s ranking on
corporate governance was because of other countries catching up rather than the
regressing of India’s corporate governance practices.
Since October 25, 2016, among the BSE listed companies, share prices of Tata Steel and
Tata Communications went up till December 30, 2016. Tata Motors, Tata Chemicals, Indian
Hotels, Tata Global Beverages, Tata Coffee and Tata Teleservices share prices went down
between October 25, 2016 and December 30, 2016. TCS, Tata Power, Tata Elxsi and Tata
Investment Corporation share prices went down from October 2016 till November 2016 and
then recovered towards December 30, 2016 (Moneycontrol, 2017).
From October 24, 2016, till November 11, 2016, investors have lost over $12bn of Tata
wealth (Mukherjee, 2016). TCS share price declined 13 per cent between October 24, 2016
and November 11, 2016. The reason behind the turnaround of Tata Steel’s stock price
towards north direction between October 2016 and December 2016 is Tata Steel UK
operations sold the Scunthorpe plant to Greybull capital for GBP 1bn. However, Mistry

blamed his predecessor Ratan Tata for the purchase of Corus for $12.9bn in 2007. On
November 11, 2016, Tata Steel outperformed BSE metal index and gave 53 per cent year
on year return to investors. However, Bloomberg-based analyst has given only 30 per cent
rating to buy the stock (Sarkar, 2016).
On October 29, 2016, Tata Group top brass met LIC (Life Insurance Corporation of India)
and assured them that the publicly held companies uphold the proper governance
standards and they would deal with Mistry independently. LIC was the major shareholder
with investments worth Rs 36,000 crore in Tata Group companies. LIC owned 13 per cent
stake each in Tata Steel and Tata Power and 10 per cent stake in Tata Global Beverages
in 2016. In 2016, LIC’s stake in TCS alone was worth Rs 14,400 crore.
As of November 7, 2016, the State Bank of India (SBI) has listened to both Tata and Mistry
parties and has not intervened. The bank wanted to have a look at the financial stability and
corporate governance practices of the group. SBI was the largest lender to the Tata Group
worth Rs 2.4 lakh crore (Moneycontrol, 2016). Tata Steel owns the highest, that is, Rs
86,204 crore from SBI. SBI was concerned about the saga going on between Tata sons and
the Cyrus Mistry.
Road ahead
As a group, we are steadfast in our resolve to maintain Tata culture and value system that all of
us have worked hard to nurture over the decades [. . .] The focus has to be on leading and not
following (Chandna, 2016) – Ratan Tata, (The Hindustan Times, November 18, 2016).
On October 27, 2016, Tata sons in a statement said, “The Tata way is not run away from
problems, or consistently complains about them, but firmly deals with them and builds a
better tomorrow” (ETB, 2016d). Ratan Tata expressed to their employees on October 26,
2016 that he took over as interim chairman for the stability and continuity of the group,
without leaving room for any vacuum.
In early November, 2016 in a letter to Tata Group companies employees, Ratan Tata said
“As a group, we are steadfast in our resolve to maintain the Tata culture and value system
that all of us have worked hard to nurture over the decades [. . .]. The focus has to be on
leading and not following” (Chandna, 2016). As on November 19, 2016, according to the
Tata Group, Ratan Tata was only the interim chairman, and they would find their full-time
chairman by February 2017. According to The Economist (dated November 19, 2016), TCS
veteran Natarajan Chandrasekaran, who has been running TCS since 2009 successfully, is
the likely candidate for Tata Group’s chairmanship. The new chairman would have to deal
with many unsolved issues such as Tata Steel UK, Tata DOCOMO and high level of group
level debt (Dubey et al., 2016). The new chairman has to clean several of these problems
and fund the new businesses. As Mistry’s issues are concerned, as on December 21, 2016,
Keywords: now the matter is with National Company Law Tribunal (NCLT) and the law takes its own
Corporate governance, course.
Investor relations,
As on January 12, 2017, Tata Sons’ selection committee has appointed N.Chandrasekaran,
Financial performance,
as Tata Group chairman. With the new chairman, hope Tata Group will scale up new
Boards of directors/senior
heights.
management,
Relatedness/conglomerate While speaking about the Tata saga, said:
strategies,
Reputation comes on foot but leaves in a Ferrari (Mehta, 2016) – Vikram S. Mehta, Senior Fellow,
Wealth management
Brooks India & Former Chairman, shell India (India Today, November 02, 2016).
Notes
1. Jaguar Land Rover is a British multinational owned by Tata Motors. In 2014, it had revenues of GBP
19.39bn. Ralf Speth has been CEO since February 18, 2010.
2. Available at: www.tata.com/htm/Group_Investor_GroupFinancials.htm#employees

3. Tata Docomo is a joint venture between Tata Teleservices and NTT Docomo since 2008. In terms
of number of subscribers, it is the seventh largest telecom player in India.
4. NTT Docomo, is a Japanese mobile phone operator having revenues of JPY 4.24 trillion in 2012
itself.
5. Tata Motors, a subsidiary of Tata Group, had revenues of $39bn in 2015.
6. TCS (Tata Consultancy Services), a Tata Group technology and business consulting company,
had revenues worth $16.54bn in 2016. It is the No. 1 and first software company in India, founded
in 1968.
7. Tata Chemicals, a Tata Group company, has chemicals, crop nutrition and consumer goods
products; it had revenues worth $2.1bn in 2012.
8. Indian Hotels Resorts and Palaces, a Tata Group company, had revenues $290m in FY2013;
Rakesh Sharma has been CEO since September 1, 2014.
9. Tata Steel, Tata Group’s steel making company, had revenues of $20bn in 2015.
10. “Ratantrum”, The Economist, November 19, 2016.
11. Air Asia India, a joint venture between Air Asia Berhad, Malaysia (49%), Tata Sons (40.06%) and
Arun Bhatia (10%). Founded on March 28, 2013; S. Ramadorai is the chairman of the company.
12. Vistara, an Indian domestic airline, owned by Tata Sons, was founded in 2013 and started
operations in January 2015.
13. HCL Technologies is an Indian IT services MNC and was founded in 1976; it had revenues worth
$6.1bn in FY2015.
14. LIC (Life Insurance Corporation of India), an India state-owned insurance and investment
company, had total assets worth $300bn in 2016 and revenues $88.4bn in 2015.
15. GIC (General Insurance Corporation of India), a state-owned reinsurance company, had $2.7bn
revenues in FY2016.
16. New India Assurance Company is an Indian Government-owned insurance player.
17. HDFC, a Mumbai-based financial conglomerate, had revenues worth $4.63bn in 2016.
18. Wadia Group is the oldest Indian conglomerate founded in 1736; its net worth was $100bn in 2012
19. Godrej Industries, a 120-year-old Indian conglomerate, is into electronics, real estate, IT,
consumer goods, agriculture, aerospace, chemicals, home appliances and furniture; its revenues
were $4.1bn in 2015.
20. Satyam Computer Services, founded by Ramalingaraju in 1987, was acquired by Tech Mahindra
and renamed as Mahindra Satyam in 2009.
21. Cognizant Technology Solutions, an American IT services MNC, had revenues $12.42bn in 2015.
References
Barman, A. (2016), “Tatas will seek to oust Cyrus Mistry from Group companies unless he quits”, The
Economic Times, 4 November.
BL (2016), “Ratan had distanced himself from Siva on Tata tele”, Business Line, 14 November.
Bloomberg (2016), “Ratan Tata needs to explain these five charges that mistry brought against him”,
The Economic Times, 27 October.
BSWT (2016), “Cyrus Mistry’s Exit: Twitterati Can’t Believe it’s true”, Business Standard, 24 October.
Business Standard (2016), “Sensex dips over 100 points, Nifty below 8,700; Tata group scrips, HDFC
drag”, Business Standard, 25 October.
Chakravarthy, M. (2016), “The fig leaf of corporate governance”, Live Mint, 1 November.
Chandna, H. (2016), “Tata vs Cyrus Mistry: lessons from the battle for Bombay House”, Hindustan
Times, 18 November.
Dalal, S. (2016), “From 2G scam to Mistry’s Ouster: don’t good governance rules apply to the revered
Tata group?”, available at: www.moneylife.in (accessed 26 October 2016).
DHNS (2016), “Tata Sons Bore Ratan’s Office costs, says Mistry”, Deccan Herald, 16 November.

Doshi, M. (2016), “Tata-mistry war: the end game”, Bloomberg Quint, 17 November.
Dubey, R., John, N. and Datta, P. (2016), “The Tatas, never known for public blowouts, sack their
chairman: how did Cyrus Mistry fall from Grace so Fast”, India Today, 27 October.
ENSEB (2016), “Independent Directors Should uphold Corporate Governance Norms: UK Sinha”,
Indian Express, 11 November.
ETB (2016a), “Big shakeup! Cyrus Mistry removed as Tata Sons Chairman, Ratan Tata Steps in”, The
Economic Times, 25 October.
ETB (2016b), “Cyrus Mistry and Tatas Spar over Docomo Case, Mistry says Ratan Tata was always
kept in loop”, The Economic Times, 2 November.
ETB (2016c), “Indian Hotels’ Q2 Numbers hint at Why Cyrus Mistry has support”, The Economic Times,
7 November.
ETB (2016d), “Cyrus Mistry has damaged the group’s image in the eyes of 6 lakh-plus employees:
Tata”, The Economic Times, 28 October.
ETN (2016a), “Cyrus Mistry’s Ouster: Only TCS’s Chandrasekaran fit to be Tata group CEO, says
RPG’s Harsh Goenka”, The Economic Times, 4 November.
FP (2016), “Ratan-Tata Cyrus Mistry fallout reminiscent of JRD-Russi Mody Spat”, First Post, 25
October.
GA (2016), “My 2 Cents on the TATA Saga”, Business Insider, 29 October.
IANS (2016a), “Tata Group Chairman Cyrus Mistry Talks of Sustainable Growth, Wants Cos to be
‘agile’”, Financial Express, 13 September.
IANS (2016b), “Tata Board Lost Confidence in Mistry’s: Messy Legal Battle ahead?”, Business
Standard, 26 October.
International Monetary Fund (2016), “Global Financial Stability Report”, International Monetary Fund,
October.
Kamath, V. (2016), “In search of corporate angels”, Business Line, 30 October.
Kurian, B. and Zacharish, R. (2016), “Cyrus Mistry ignored advice to sell 5% in TCS: insiders”, The
Mampatta, S. (2016), “Has India slipped down the ladder of corporate governance?”, Live Mint, 26
October.
Mehta, V.S. (2016), “To keep good company”, India Today, 2 November.
Mohan, T.T.R. (2016), “The mistry affair shows why independent directors are not so independent”, The
Wire, 15 November.
Mohil, S.S. and Upadhyay, J.P. (2016), “Are Tata group independent directors doing justice to their
role”, Live Mint, 18 November.
Moitra, S. (2016), “Institute of company secretaries sees no corporate governance norms breach, says
a Chairman can be removed without prior intimation”, DNA India, 7 November.
Moneycontrol (2016), “SBI Concerned Tata-Mistry Conflict Will Affect Tata Cos”, 7 November, available
at: www.moneycontrol.com,
Moneycontrol (2017), “Tata Group Companies share prices”, available at: www.moneycontrol.com,
(accessed 1 January 2017).
Moneylife (2016), “Corporate Governance Indian Style: what cyrus mistry proposed and what he got
from the Tatas”, available at: www.moneylife.in (accessed 17 November 2016).
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Mukherjee, A. (2016), “Ratan Tata, Cyrus Mistry face-off turns Murkier”, Live Mint, 11 November.
Pandey, P. (2016), “Tata chemicals’ independent directors repose full confidence in Cyrus Mistry”, The
Hindu, 10 November.
PTI (2016a), “Mistry-Tata row: Brickwork Ratings Downgrades Tata Steel”, The Economic Times, 31
October.

PTI (2016b), “Tata Group stock take further pounding on corporate governance concerns”, The Hindu,
27 October.
Reuters (2016), “Tata Motors avoided commenting on Mistry’s Future as Chairman”, Business Insider,
14 November.
Sanghi, A. (2016), “It’s Tough being Cysrus Mistry, Who values people over profits, and reputation over
revenue, says school friend”, Quartz India, 16 November.
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Shah, A. and Choudhury, S. (2016), “Ouster Tata Chairman tried for balanced Corporate Governance:
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Further reading
Choudhary, S. (2016), “Mistry Moves Law Tribunal against Tata Sons”, Business Standard, 21
December.
ENS (2017), “Tata sons appoints TCS chief N. Chandrasekaran as chairman”, Indian Express, 12
January.
ETB (2016e), “Cyrus Mistry to Remain Chairman of Tata Steel: Report”, The Economic Times, 12
November.
ETN (2016b), “Should not be an alarmist at the Tata Group Developments: Leo Puri, UTI AMC”, The
Economic Times, 28 October.
ETN (2016c), “Clear Corporate Structure will help Tatas in Long Run, Says M Damodaran, Former SEBI
Chief”, The Economic Times, 16 November.
John, S. and Singh, R. (2016) “Tata motors independent directors back cyrus mistry”, The Economic
Times, 15 November.
Sengupta, D. and Basu, S.D. (2016), “Cyrus Mistry vs. Ratan Tata, a valuable lesson for B-School
Students”, The Economic Times, 3 November.
Singh, R. (2016), “Cyrus Mistry Unlikely to legally Challenge his Ouster as the Chairman of Tata Sons”,
The Economic Times, 18 November.
Tiwari, D. and Bhalla, M. (2016), “Corporate Governance Standards Intact, Ratan Tata Assures LIC”,
The Economic Times, 29 October.
Vijayaraghavan, K. and Kalesh, B. (2016), “Independent directs may back Cyrus Mistry in board
meetings, AGMs”, The Economic Times, 8 November.
Zachariah, R. and Shah, P. (2016),”SEBI to look into Tata-Mistry Saga for possible breach of corporate
governance rules”, The Economic Times, 27 October.
Zachariah, R. and Sinha, P. (2016), “Ratan Tata or Cyrus Mistry: who will Nusli Wadia back?”, The
Websties
Available at: http://tata.com/htm/Group_Investor_GroupFinancials.htm
Available at: http://timesofindia.indiatimes.com/business/india-business/Tata-group-revenue-tops-100-

billion-profit-slips-to-near-5-billion/articleshow/16899938.cms
Available at: www.chinniholidays.com/htm/Group_Investor_GroupFinancials.htm

Available at: www.business-standard.com/article/companies/tata-group-debt-peaked-leverage-
declined-under-mistry-116111001425_1.html, www.tata.com/htm/Market-capitalisation-of-Tata-
companies.htm
Available at: http://indiatoday.intoday.in/story/cyrus-mistry-tata-group-ratan-tata/1/796683.html
Available at: https://en.wikipedia.org/wiki/Tata_Sons

Available at: www.tata.com/htm/Group_milestone.htm
Available at: http://gtw3.grantthornton.in/assets/Companies_Act-Governance.pdf
Exhibit 1. Tata Group financial details
Table EI
Change Change
Year 2015-2016 (Rs crore) 2014-2015 (Rs crore) (%) 2015-2016 (US$bn) 2014-2015 (US$bn) (%)
Total revenues 677,556 665,185 1.9 103.51 108.78 ⫺4.8

Sales 666,182 653,381 2.0 101.77 106.85 ⫺4.8
Total assets 789,580 721,180 9.5 120.6 117.9 2.3
International revenues 456,194 448,918 1.6 69.69 73.41 ⫺5.1
Net Forex earnings 49,434 40,971 20.7 7.6 6.7 13.4
Notes: Exchange rate: US$ ⫽ Rs 65.46 for 2015-2016; US$ ⫽ Rs 61.15 for 2014-2015
Source: http://tata.com/htm/Group_Investor_GroupFinancials.htm
Exhibit 2. Tata Group companies market capitalization (as on December 30,

2016)
Table EII
Market capitalization Market capitalization
Name of the Tata Group company (In Rs crore) (In $bn)
TCS 465,405 68.52

Tata Motors 136,088 20.04
Tata Steel 37,984 5.59
Titan Company 28,920 4.26
Tata Power 20,474 3.01
Tata Motors (DVR) 15,211 2.24
Tata Communications 17,894 2.63
Tata Chemicals 12,779 1.88
Tata Global Beverages 7,703 1.13
Voltas 10,861 1.60
Indian Hotels 9,715 1.43
Trent 6,681 0.98
Rallis 3,732 0.55
Tata Investment Corporation 3,079 0.45
Tata Elxsi 4,367 0.64
Tata Coffee 2,113 0.31
Tata Teleservices (Maharashtra) 1,177 0.17
Note: Exchange rate $ ⫽ Rs 67.92
Source: www.tata.com/htm/Market-capitalisation-of-Tata-companies.htm

Exhibit 3. Tata Sons shareholding pattern
Table EIII
Name of shareholder No. of shares Share holding (%)
Shapoorji Pallonji 108 0.026723

Sterling Investment Corp (Shapoorji Pallonji Group) 37,120 9.18489
Cyrus Investments (Shapoorji Pallonji Group) 37,120 9.18489
Ratan Tata 3,368 0.83337
Sir Dorabji Tata Trust 113,067 27.97705
Sir Ratan Tata Trust 95,211 23.5588
Tata Investment Corp 326 0.080665
Sarvajanik Seva Trust 396 0.097985
RD Tata Trust 8,838 2.186855
Tata Social Welfare Trust 15,075 3.730125
Tata Education Trust 15,075 3.730125
JRD Tata Trust 16,200 4.008492
Tata Power 6,673 1.651152
Tata Tea 1,755 0.434253
Indian Hotels 4,500 1.11347
Tata Industries 2,295 0.56787
Tata Chemicals 10,237 2.533021
Kalimati Investment Co 12,375 3.062043
Tata International Ltd 1,477 0.365466
Tata Motors 12,375 3.062043
Piloo Tata 487 0.120502
Jimmy Naval Tata 3,262 0.807142
Vera Farhad Choksey 157 0.038848
Jimmy Tata 157 0.038848
Simone Tata 2,011 0.497597
Noel Tata 2,055 0.508485
HH Maharawal Virendra Singh Chauhan Raja of
Chhota Udepur 1 0.000247
MK Tata Trust 2,421 0.599047
Notes: Total equity shares 404,142 [around 1,000,000 each]; Price of share as on July 1, 2015, is
Rupees 60,000
Source: https://en.wikipedia.org/wiki/Tata_Sons

Exhibit 4. Major milestones of Tata Group
Table EIV
Year Milestone for Tata Group
2016 Strengthened presence in Myanmar

2015 Vistara takes into skies; Entered into joint venture with Boeing
2013 Tata Sons and Singapore Airlines to start a new airline business in India
2012 Cyrus Mistry took over as Chairman of Tata Sons from Ratan Tata
2010 Tata Tea joint venture with PepsiCo for health drinks
2009 Entered into GSM Services with NTT DOCOMO
2008 Tata Motors unveils Nano, the people’s car; acquires Jaguar Land Rover from Ford
2007 Tata Steel acquires Anglo Dutch Steel Company, Corus (now Tata Steel Europe)
2006 Tata group acquires Boston based Ritz-Carlton Hotels; started retail stores Croma
2004 Tata Motors acquires South Korean Daewoo Motors
2003 TCS crosses $1 billion annual revenues; Entered into Mobile with Tata Indicom (later consolidated into Tata DOCOMO
in 2011)
2001 Entered into Insurance sector with a venture Tata AIG, jointly with AIG, USA
2000 Tata Global Beverages acquires an international brand, Tetley, UK
1998 Tata Indica–India’s first indigenously design and manufactured car released
1996 Entered into Telecom Sector with setup of Tata Teleservices
1984 First Thermal Power station Trombay with setup of Tata Electric Company
1968 India’s first software company, Tata Consultancy Services (TCS) was established
1962 Entered into tea sector with Tata Finlay, renamed to Tata tea then became Tata Global Beverages; Setup leading
export house Tata International
1954 Established major engineering, manufacturing and marketing company Voltas
1952 Entered into cosmetics with establishment of Lakme, later merged into Hindustan Lever (now Unilever) in 1997
1945 Entered into manufacturing locomotives and engineering products with Tata Engineering and Locomotive Company
(now Tata Motors)
1939 Entered into chemicals sector with Tata Chemicals, largest producer of soda ash in India
1932 Entered into aviation sector with Tata Airlines. Air India was nationalized in 1953
1917 Entered into consumer goods with Tata Oil Mills Company
1911 Indian Institute of Sciences (IISc) has been established in Bangalore for advanced studies purposes
1910 Entered into Power sector with establishment of Tata Electric Company, Tata Hydro-Electric Power Supply Company;
setup Andhra Valley Power Supply Company in 1917. First two companies merged in Tata Power in 2000
1907 Entered into Steel sector with establishment of Tata Iron and Steel Company (now Tata Steel) in Jamshedpur. Started
production in 1912
1902 Entered into hospitality sector with setup of Taj Mahal Palace
1874 Entered into textiles with establishment of The Central India Spinning, Weaving and Manufacturing Company
1868 Jamsetji Nusserwanji lays foundation for Tata Group by starting a trading firm
Source: www.tata.com/htm/Group_milestone.htm

Exhibit 5. Proposed corporate governance structure for Tata Group (By Mistry)
Figure E1
Tata Trusts
(Unlisted Enes)
Board of Tata Sons

(Unlisted Organizaon)
Chairman, Group Heads, and Directors

of Tata Sons
Board of Directors of Group Companies

(Listed in Stock Exxhanges)
CEOs and Top Management of Group

Companies
Source: Moneylife (2016)
Exhibit 6. Tata Sons shareholding pattern
Figure E2
16% Shapoorji
18%
Pallonji
Tata Trusts
Various Tata
Group
66%
Companies
Source: http://indiatoday.intoday.in/
story/cyrus-mistry-tata-group-ratan-tata/
1/796683.html

Exhibit 7. Tata Group Performance–Before and At Ouster of Mistry
Table EV
Revenues (2011-2012) Revenues (2015-2016)
Tata Group company (in US$bn) (before Mistry) (in US$bn) (at Mistry’s Ouster) Change (%)
Total Revenues 100.09 103.51 3.42

Sales 99.10 101.77 2.03
Total Assets 108.55 120.6 11.1
International Revenues 59.09 69.69 17.94
Net Forex Earnings 1.59 7.6 377.99
Gross Debt Rs. 1,57,000 crore Rs. 2,36,000 crore –
Net Worth Rs 1,27,000 crore Rs 1,92,000 crore ⫹
Leverage Ratio 1.24 1.23 –
Source: http://timesofindia.indiatimes.com/business/india-business/Tata-group-revenue-tops-100-billion-profit-slips-to-near-5-billion/
articleshow/16899938.cms; http://tata.com/htm/Group_Investor_GroupFinancials.htm; www.chinniholidays.com/htm/Group_Investor_Group
Financials.htm; www.business-standard.com/article/companies/tata-group-debt-peaked-leverage-declined-under-mistry-116111001425_
1.html
Exhibit 8. Tata Group’s share (%) of underperforming invested capital
Figure E3
100%
% of Underperrformin g
90%
Invested Caapital
80%
70%
60%
50%
40%
30%
20%
10%
0%
08
200 2009 2010 2011 2012 201
13 2014 2
2015 2016
Source: The Economist (2016)

Exhibit 9. India’s minority shareholders’ protection score
Figure E4
6 5.4
Minority
5 Shaareholders'
4..1 4.2 4.1 Pro
otecon
Sco
ore
4
(Em
merging
Maarkets)
3
Minority
2 Shaareholders
Pro
otecon
1 Sco
ore (India)
0
20
006 2014
Source: International Monetary Fund

(2016)
Exhibit 10. India’s investors’ protection score (inverse scale)
Figure E5
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
7 8
10
13
20
30
33
3 33 34
38
40 1
41
44
46
50 49
60
Source: World Bank (2016)
About the author

Goparaju Purna Sudhakar, PhD, PMP is currently working as a Faculty Member at The
ICFAI University Group, Hyderabad, India. He was awarded PhD in Business
Administration from Aligarh Muslim University (AMU), India. He received the Best Teacher
(Management) award in 2015 from MTC Global. He won gold medal in Manager’s
Olympiad 2016 conducted by UNICOM at DevOps Conference in Bangalore. Goparaju
Purna Sudhakar can be contacted at: purna24@hotmail.com

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CHRIST (Deemed to be University)

II. Reading Materials

III. Cases and Research Paper

*Will be handed over in hard copy

At the end of the course, students should be able to:

Unit II Ethics and Investment Professionalism (2 Hrs)

Unit III Conceptual Framework of Corporate Governance (2 Hrs)

Unit IV Legislative Framework of Corporate Governance and Risk Management (2 Hrs)

Unit V Corporate Governance and Stakeholder’s Right (2 Hrs)

Unit 1: Ethical dilemmas in Corporate Finance (3 Hours)

1 Governance through inner consiscousness- Discussion and Course pack Reading

2 Ethical dilemma on Corporate finance Case Analysis Caselets – (1) The

(2) The curious loan

Unit 2: Ethical dilemmas in Investment Profession (3 Hours)

4 Board of management- Ethical Conundrum Case Analysis Case – Himachal

Unit 3: Conceptual Framework of Corporate Governance (3 Hours)

Theories of corporate governance- Discussion Course pack Reading

6 Agency Vs Tunneling Case Analysis Case study -Tunnelling vs

Unit 4: Legislative Framework of Corporate governance (1.5 Hours)

7 Clause 49 of the disclosures - Corporate Discussion Refer the Course pack

8 Corporate Governance and sustainability Case Analysis Case: Governance and

* Will be handed over in hard copies

1. Fernando, A. (2012). Business Ethics and Corporate Governance (2 ed.). Noida:

Components of the Assessment Marks Weightage

CIA 2 Group Assignment – Corporate governance Framework 20 40%

Attendance As per the rubrics given by the instructor 5 10%

TOTAL MARKS 50 100%

Details of the Assignment

The company agrees to comply with the following provisions:

(A) Composition of Board

Explanation-For the purpose of the expression “related to any promoter” referred to

Clause 49- Corporate Governance

(B) Non executive directors’ compensation and disclosures

All fees/compensation, if any paid to non-executive directors, including independent

(C) Other provisions as to Board and Committees

Clause 49- Corporate Governance

(D) Code of Conduct

II. Audit Committee

(A) Qualified and Independent Audit Committee

Clause 49- Corporate Governance

Explanation 2: A member will be considered to have accounting or related financial

iii. The Chairman of the Audit Committee shall be an independent director;

(B) Meeting of Audit Committee

(C) Powers of Audit Committee

(D) Role of Audit Committee

The role of the audit committee shall include the following:

Clause 49- Corporate Governance

Clause 49- Corporate Governance

(E) Review of information by Audit Committee

The Audit Committee shall mandatorily review the following information:

III. Subsidiary Companies

Clause 49- Corporate Governance

i. A statement in summary form of transactions with related parties in the ordinary

(B) Disclosure of Accounting Treatment

Where in the preparation of financial statements, a treatment different from that

(C) Board Disclosures – Risk management

(E) Remuneration of Directors

i. All pecuniary relationship or transactions of the non-executive directors vis-à-vis

Clause 49- Corporate Governance

i. As part of the directors’ report or as an addition thereto, a Management Discussion

Clause 49- Corporate Governance

Clause 49- Corporate Governance

VI. Report on Corporate Governance