CHAPTER 4

EXISTING CORPORATE GOVERNANCE PRACTICES

FOLLOWED BY PUBLIC AND PRIVATE COMPANIES
IN INDIA

4.1 Types of Corporate Scandals

4.1.1 Falsification of Accounts
4.1.2 Under Invoicing
4.1.3 Over Invoicing
4.1.4 Tax Evasion
4.1.5 Misappropriation of Assets
4.1.6 Fraudulent Financial Reporting
4.2 Causes of Corporate Fraud
4.3 Big Corporate Frauds in India
4.3.1 Harshad Mehta Scam-1984
4.3.1.1 List of Changes by SEBI after the Harshad Mehta Scam
4.3.2 Saradha Scam-2009
4.3.3 Satyam Computer Limited Scam
4.3.3.1 Corporate Governance Issues at Satyam
4.3.2.2 Changes by SEBI after the Satyam Scandal
4.3.4 The C R Bhansali Case- Year 1995
4.3.5 The Cobbler Case- Year 1996
4.3.6 The Dinesh Dalmia Case – Year 1998
4.3.8 The Virendra Rastogi Case-Year 2002
4.3.9 The Abdul Karim Telgi Case- Year 2006
4.3.10 The UTI Case
4.3.11 Ketan Parekh Scam- Year 2001
4.3.11.1 Reasons for Fraud
4.3.11.2 Effect of Fraud
4.3.12 Sahara Scam- Year 2010
4.3.13 Vijay Mallya Scam- Year 2017
4.3.14 Ram Sumiran Pal, Speak Asia
 CHAPTER 4
EXISTING CORPORATE GOVERNANCE PRACTICES
FOLLOWED BY PUBLIC AND PRIVATE COMPANIES IN
INDIA

This Chapter provides a brief sketch on the existing Corporate Governance

practices followed by public and private enterprises in India. Before narrating the
status of Corporate Governance in India and its economic effect, it is important to
look into the existing Corporate Governance practices followed by public and
private Companies in India. At the time of independence, India was one of the
poorest economies among the others. The rules and regulations dealing with
Corporate Governance has seen substantial and significant changes since 1990s. 239
International Organizations triggered reshaping of the Indian economy through
strong competitive pressures. 240 Initiation of economic reforms ended with both
lethargy and traditional source of dominance of a large and powerful class of family
businesses. 241

One of the principle of Corporate Governance is transparency and

disclosures. 242The strengthening of certain shareholder rights, the empowering of
SEBI emerged from the practices of Corporate Governance . 243Poor Corporate

239
Until early 1990’s corporate governance has never been an primary agenda of Indian Companies.
Corporate governance concept got the importance only after 1990s. When the government
approached IMF after the fiscal crisis of 1991, suggested the Government to adopt reformative
actions for economic stabilization through liberalization. As a part of liberalization process, in
the year 1999 Companies Act, 1956 was amended. Further amendments have followed
subsequently in the year 2000, 2002 and 2003.
240
The need to access international markets for their capital requirements also motivated the
companies to focus on good governance.
241
India has been facing the challenges posed and capitalized on the opportunities offered by the
new economic environment. The foreign institutions (or say investors) played a key role in the
gradual improvement in disclosure standards which were below average to the international
standard. Some Indian companies already compare most favorably with the best in the world.
242
Sumant Batra, “India: An overview of Corporate Governance of Non-Listed Companies”
available at https://www.ifc.org/wps/wcm/connect/582f0a804af4b8b8a5cfb5b94e6f4d75/
oecd_nonlist.pdf?MOD=AJPERES (accessed on 15.07.2017).
243
SEBI is making continuous efforts to protect the interest investors by way of strengthening the
corporate governance guidance by asking companies for more and more disclosure of
information on companies working in financial statements. For that investor has to check, who
are the promoters of the company, also see the corporate governance practices existing in that
company and see that the disclosure practices are us per mandated by clause 49
Existing Corporate Governance Practices Followed by Public and Private Companies in India 85

Governance and lack of transparency have provided a chance to the

promoters 244 to rob their financial stakeholders 245 of their fair share of the
company’s earnings and assets. Thereafter, the governments stepped into offering
stakeholders long-term relief by providing good Corporate Governance. 246

Corporate frauds including WorldCom, Enron at global level and fraud at

Satyam computers and others shocked the investors and shareholders in India.
Investors become more cautious while investing in India. 247 All these issues bring
forth the issue of poor implementation of Corporate Governance in India. It is
pertinent to mention here that though Corporate Governance is mandatory in the
Public Limited Companies in India but it is not mandatory in Private Limited
Companies.

The Corporate Governance guidelines issued by different regulatory bodies,

though followed by Public Companies and some of the Private Companies as well
but we did not find any universal implementation of Corporate Governance norms in
India. Continuous efforts have been made by the Government to provide guidelines
to implement Corporate Governance but it failed to combat corporate frauds.
Therefore, before analyzing the Corporate structure and its Governance norms let us
examine various corporate scandals/ fraud done by the Indian companies. 248

of listing agreement. The sustained efforts of the government and regulatory bodies and to self-
regulating measures adopted by the industry associations also played a key role in enforcing the
large companies to have desirable corporate governance practices. E.g. to prosecute the
defaulting companies, increased sanctions for directors who do not fulfill their responsibilities,
limits on the number of directorships, changes in reporting and the requirement that a ‘small
shareholders nominee’ be appointed on the Board of companies with a paid up capital of Rs. 5
crore or more. For more details see Omkar Goswami, “Corporate Governance in India: Taking
Action against Corruption in Asia and the Pacific”, Manila, Asian Development Bank, Chap 9,
2002.
244
Promotors includes the founder of the firms and majority shareholder for instance.
245
Shareholders and creditors.
246
Good corporate governance is more than about simple compliance with international standards.
247
Available at http://ssrn.com/abstract=1686650, For more details kindly see https://mba.
americaeconomia.com/sites/mba.americaeconomia.com/files/sanjay_p._s._dessai.pdf (accessed
on 15.07.2017).
248
Companies include the promoters, major shareholders, founders of the company and other major
decision maker in a company, who are mainly responsible for the corporate scandals/ non-
performance of the corporate governance principle.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 86

In a report by Espirito Santo Securities, the brokerage released a list of five

companies that have scored poorly on Corporate Governance including: 249
1. Dhanlaxmi Bank 250
2. 3i Infotech 251
3. Biocon 252
4. Financial Technologies 253
5. Educomp 254

The Private Companies like Tata Group, Aditya Birla Group, Infosys
Technologies, Wipro Technologies, Godrej Group, Mahindra and Mahindra Group
and Larson and Toubro etc. are giving a lot of importance to Corporate Governance.
Public Sector Companies, which have been, Listed Companies like ONGC, Indian
Oil Corporation Ltd. BHEL, NTPC, GAIL, Engineers India Limited and Gujarat
Alkalies and Chemicals Ltd. Bharat Electronics Limited etc. are following
guidelines on Corporate Governance.

249
Available at https://www.ndtv.com/business/5-companies-that-score-poorly-on-corporate-
governance-306418 (accessed on 14.03.2018).
250
The whistle blower letter from the Union government to the RBI regarding the bank’s accounting
practices, along with the significant uncertainty surrounding the bank’s strategy post the
management change, has caused significant losses to shareholders. The brokerage has
downgraded its rating to red for the way the bank has handled the events surrounding the
management change.
251
The company did two back to back QIPs to retire debt. Despite raising Rs.5 billion, debt levels
have increased as most of the money has been wasted. During the quarter following the first QIP
massive earn-outs, which were not disclosed in the QIP document, were paid and QIP proceeds
were invested into an e-governance business, later discontinue. This warrants a red light,
according to the brokerage.
252
Aggressive accounting treatment of deferred revenue coupled with historic capitalization of
biosimilar insulin Research and Development will, likely result in a consistent inflating of EPS
for six years in a row from FY10-15.
253
The brokerage says it maintains its red flag on Corporate Governance due to lack of consolidated
quarterly reporting and disclosures, which it says is below par, and lack of communication with
Investors and analysts, for there have been no conference calls or analysts meetings in the past
two years. A substantial proportion of the company’s standalone revenues are from related
parties, the brokerage says.
254
The key issues for a red flag are 1) common address of registered office of Edu Smart (SPV, or
special purpose vehicle) and its statutory auditor, 2) the cost of resource co-coordinator, that
should have been borne by the SPV, is being borne by Educomp and the SPV is not being
consolidated, which is negative for minority shareholders of Educomp, 3) high turnover of
company secretaries at the SPV which casts doubt on overall compliance policies, and 4)
executive director of K-12 segment at Educomp was the first signatory to the MoA of SPV.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 87

4.1 Types of Corporate Scandals

Corporate frauds are those activities undertaken by an individual or company
that are done in a dishonest or illegal manner, and are designed to give an advantage
to the perpetrating individual or company. There are various Corporate Frauds such
as;

4.1.1 Falsification of Accounts

Term falsification of accounts means to manipulate the account of an
enterprise in such a manner that will not give the true financial position of the
company. Some enterprises manipulate the accounts to get the desirable profit out of
misleading information (or the accounts and financial statement do not present a true
and fair picture of the Company’s financial health). Many international accounting
and Audit Firms had been indulged in falsification of accounts.

Some of the methods usually adopted to falsify accounts are as follows:

a) Showing fake and excessive expenses in the books of account.
b) Making bogus entries in the books of account with some ultimate motive.
c) Undervaluation or overvaluation of stock.
d) Charging excessively low or high depreciation in order to inflate or reduce
projects.
e) Over valuation or under valuation of assets
f) Over valuation or under valuation of liabilities.
g) Making fictitious entries of loans from promoters or directors to route black
money.

4.1.2 Under Invoicing

Importers are required to pay custom duty on imported goods generally
according to the value of imports. Importers ask the exporters to show low prices of
goods in the invoice so as to minimize custom duty payment. The difference
between actual prices and prices shown in invoice is remitted to exporters through
illegal means. In such cases, customs officials are also bribed to -get clearance of
imported goods.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 88

4.1.3 Over Invoicing

Exporters get cash and other incentives from the Government as mean of
export promotion. Exporters make change in the invoice to claim greater amount of
incentive. They compensate foreign buyers for difference in prices by illegal means.
Thus, under-invoicing and over-invoicing are scandals adopted by companies
engaged in international trade.

4.1.4 Tax Evasion

Many business firms suppress their sales turnover and net profits so as to
reduce their tax liability. Bribes are paid to tax officials for assessing lower turnover
and projects. Tax evasion is more common in case of income tax, sales tax, excise
duty and stamp duty. 255

4.1.5 Misappropriation of Assets

Misappropriation of assets, often called defalcation or employee fraud,
occurs when an employee steals company's asset, whether those assets are of
monetary or physical nature. Typically, assets stolen are cash or cash equivalents
and company data or intellectual property. However, misappropriation of assets also
includes taking inventory out of a facility or using company assets for personal
purpose without authorization.

4.1.6 Fraudulent Financial Reporting

Fraudulent financial reporting means an intentional manipulation of
accounting policies or accounting estimates to improve financial statements. Public
and Private Enterprises commit fraudulent financial reporting to secure investor
interest or obtain bank approvals for financing, as justifications for bonuses or
increased salaries or to meet expectations of shareholders. The corporate fraud at
Stock exchange occurred due to the above reason.

4.2 Causes of Corporate Fraud

Corporate Fraud is committed mostly by the promoters and founders of the
Company (includes the majority shareholder). It ruins the reputation of the company

255
K Sowmya, “Corporate Scandals in India”, Cauvery Research Journal, Vol 3, Issue 1 and 2,
2009.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 89

as well the economic health of the nation. There are various causes that led to
Corporate Fraud; some of these are as:
a) A weak internal control is an opportunity for fraudster.
b) Lack of transparency in financial transactions is an ideal method to hide a
fraud.
c) Poor management information where a company's management system does
not produce results that is timely, accurate, sufficiently detailed and relevant.
d) Lack of an independent audit department within the company is also a sign
of weak internal control. Poor accounting practice is also part of a weak
internal control.
e) An example of poor accounting practice is failure to make monthly
reconciliation of bank account. 256
f) Top managers tend to share price to make a company an
easier takeover target. When the company gets bought out (or taken private)
at a dramatically lower price the takeover artist gains a windfall from the
former top executive's actions to surreptitiously reduce share price.

Not all accounting scandals are caused by top executives. Often managers
and employees of the firms are pressurized or sometimes willingly alter financial
statements for the pecuniary and personal benefit. Managerial opportunism plays a
large role in these scandals. For example, managers who would be compensated
more for short-term results would report inaccurate information, since short-term
benefits outweigh the long-term ones such as pension obligations. 257

It is noteworthy that the list is not complete, as day by day the owners of the
capital are finding new methods of cheating/ defrauding people and in a way
ignoring their liability to follow the Corporate Governance norms. Lack of ethics in
governance seems the prominent reason behind these scandals e.g. PNB – Nirav
Modi scam, just as valueless governance led to scandals like Enron and
WorldCom 258.

256
Frost Ken, "Top 10 reasons why frauds occur", Metro (2012).
257
Cunningham Lawrence, "The Appeal and Limits of Internal Controls to Fight Fraud, Terrorism,
Other Ills".
258
Ajit Parulekar speaking to IANS following the announcement of a six-month intensive workshop
for the management school's faculty and Board of Governors on Transformative Teachers
Existing Corporate Governance Practices Followed by Public and Private Companies in India 90

4.3 Big Corporate Frauds in India 259

Corporate Fraud is a global phenomenon and India is not an exception of it.
In India as well various Corporate Scandals has been committed which adversely
affect the market and ruins the economy of nation. Some of these scandals which
involve the Corporate Governance issues are as follows:

4.3.1 Harshad Mehta Scam-1984

The year 1984 witnessed the first biggest scam namely the Harshad Mehta
Scam. After becoming a member of the Bombay Stock Exchange 260 by 1990, a
number of eminent people began to invest in his firm and utilize his services. Upto
1990, Banks were not allowed to invest in the equity markets. However, they were
expected to post profits and to retain a certain ratio of their assets in government
fixed interest bonds. Mehta cleverly squeezed capital out of the Banking system to
address this requirement of banks and pumped this money into the share market. He
used this money temporarily in his account to buy shares, thus hiking up demand of
certain shares, dramatically, selling them off, passing on a part of the proceeds to the
Bank and keeping the rest for himself. This resulted in the stocks like ACC, which
was trading for Rs. 200/- in 1991 share, to nearly Rs. 9000 in just 3 months. 261
Securities were not returned back and forth in reality. Instead, the borrower, i.e. the
seller of securities, gave the buyer of the securities a Bank Receipt. The Bank
Receipt confirms the sale of securities. 262

Mehta needed Banks, which could issue fake Bank Receipts, not backed by
government securities. The Bank of Karad and the Mumbai Mercantile Bank issued
the fake bank receipt, thereafter, the other banks gave money to Mehta, assuming
that they were lending against Government securities when this was not really the

conducted by The Dalai Lama Center for Ethics and Transformative Values at Massachusetts
Institute of Technology, Parulekar, available at //economictimes.indiatimes. com/articleshow/
65459295.cms?utm_source=contentofinterestandutm_medium=textandutm_campaign=cppst
(accessed on 15.07.2016).
259
Analysis of Corporate Frauds in India from ethical perspective, Twelfth AIMS International
Conference on Management.
260
Parikh, Daksesh, Katiyar, "Spreading Shockwaves", India Today (8 January 2013).
261
Sucheta Dalal, DebashisBasu, “The Scam: from Harshad Mehta to Ketan Parekh, also includes
JPC FIASCO and Global Trust Bank Scam (8th ed.). Mumbai: Kensource Publications (29 July
2014). .
262
It acts as a receipt for the money received by the selling bank. It also states that in the mean time,
the seller holds the securities in trust of the buyer.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 91

case. Since he had to book profits in the end, the day he sold was the day when the
markets crashed.

In 1992 Mehta's illegal methods was exposed as he was illegally dipping into
the banking system. When the scheme was exposed, Banks started demanding their
money back, causing the collapse. He was arrested and banished from the stock
market with investors holding him responsible for causing a loss to various
entities. 263

This case raised a serious issue of Corporate Governance, as in this case it

was not clear that who is more responsible for this collapse. There were loopholes in
the system and Mehta took advantage of this. This case raised the concern that the
Corporate Governance being much sensible area should be crack proof. This scam,
instead of suggesting any reforms, shocked the Indian Corporate and even the
Government as this was the first case of technical fraud in India.

4.3.1.1 List of Changes by SEBI after the Harshad Mehta Scam

a) Full disclosure norms were introduced strictly. This norm was with respect to
material facts, specific risk factors, prudential norms, etc. Guidelines
regarding requirements of full disclosure to SEBI were introduced.
b) The Listing Agreement was introduced and adherence to it was made
mandatory by all listed companies.
c) A code of advertisement was introduced to ensure that the companies
disclosed all the information in an honest and trusted manner to the investors
at the time of making a public offer for purchase of securities.
d) The Stock Exchange with online, screen-based, nation-wide electronic
trading was introduced to increase transparency of operations. The Bombay
Stock Exchange switched over to online, screen-based trading.
e) A revised carry forward system replaced the badla 264 system.

263
"Harshad Mehta sentenced to five years' RI", 28.09.1999, available at rediff.com (Accessed on
22.03.2017).
264
Badla System was introduced in the Bombay Stock Exchange to combat the shortage of funds in
the secondary markets. It was the system of purchasing securities by borrowing money from
various brokers.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 92

f) Requirements to be fulfilled before making public offers for purchase of

securities to the public were also introduced.

4.3.2 Saradha Scam-2009

The Saradha scam is also called as the Ponzi scheme, run by Saradha Group.
It was a consortium of over 200 Private Companies that was trusted to be running
collective investment schemes popularly referred as chit funds. 265 The group
collected around ₹200 to 300 billion 266 before it collapsed in April 2013. The West
Bengal Government instituted an inquiry to investigate the collapse. 267 The group
used a nexus of companies to launder money and evade regulators.268 Initially, the
frontline companies collected money from the public by issuing secured
debentures and redeemable preferential bonds.269 SEBI earlier warned the State
Government in 2011, but Saradha Group changes its methods.

Meanwhile, Saradha Group started laundering a large portion of its funds to

Dubai 270, South Africa 271 and Singapore. 272 By 2012, SEBI was able to classify the
group's activities as collective investment schemes rather than chit funds and
demanded that it immediately stop operating its investment schemes until it received
permission to operate from SEBI. Saradha Group did not comply with this ruling
and continued to operate until its collapse in April 2013.

In 2013, the group's cash inflow was, for the first time, less than its cash
payouts. This outcome is inevitable in a Ponzi scheme that is allowed to run full
course. The chairman of the Group tried but failed to calm uneasy depositors and

265
"Chittichitti bang bang", The Telegraph, Mumbai, 30 April 2013.
266
Soudhriti Bhabani, "Anger mounts over Saradha fund crisis as thousands of depositors face
ruin", Daily Mail (accessed on 19.01.2017).
267
"Mamata announces SIT, inquiry into Saradha", The Telegraph, Kolkota,01.03.1999.
268
"PM says unauthorized deposit collection has to be curbed", The Times of India, New Delhi,
28.04.2013.
269
Vinay Pande, "Saradha chit fund scam: State government failed, but so has centre", The
Economic Times, 26.04.2013.
270
"Fraud office catches West Asia whiff", The Calcutta Telegraph, 09.09.2014.
271
Madhuparna Das, "Money trail leads to hawala channels, offshore accounts", The Indian
Express, 12.09.2014.
272
"Saradha group cheat fund: A money trail of fraud", First Post,(accessed on 19.02.2017).
Existing Corporate Governance Practices Followed by Public and Private Companies in India 93

agents and could not increase inflow of funds. 273 Thereafter, the chairperson wrote a
confession letter to the CBI, in which he admitted that he had paid large sums of
money to several politicians. 274 SEBI stated that both chain marketing and forward
contracts are forms of CIS and officially asked Saradha Group to immediately desist
from raising any further capital and return all deposits within three months. 275

In Feb 2014, SudiptaSen was sentenced to three years; it was the first
conviction in a series of civil and criminal cases, relating to corporate fraud and non-
payment of deposits, pending against him. 276

This scam affected the investors at large, as every home has a bankrupt
depositor or a fugitive agent 277. Traders have lost interest in opening shutters. There
is a sense of treachery that has replaced the warmth of a neighbourhood 278. In short
we can say that fraud could have been prevented if the Government took notice and
take proper action in timely manner. But the state government did not take any
action even SEBI has directed it. As the SEBI was also aware of its limitation that
chit fund are regulated by State Government. In year 2009 SEBI has issued notice to
Sharada Group for not complying with law for not issuing prospectus and not
obtaining permission before issuing securities The Investors didn’t pay attention to
this fact. Moreover the investors should understand everything that bright is not
gold. No one took note of SEBI warning till confessional letter by Mr. Sen appeared
in social media. Whatever is the scam- whether it is Harshad Mehta, Satyam Fraud,
Sahara Estate Fraud of Shardha Chit fund fraud. Every time it has affected the
economy of the nation. Now the question which arises for consideration that when
we have so many laws in place then why these corporate frauds.

273
Bandopadhay, Krishnendu. "Saradha chit fund mess: Quick-rich dreams lie crushed" The Times
of India, 23.04.2013.
274
"Politicos in dock over Saradha scam", Deccan Herald, 24.04.20013.
275
'Boxed in', Sebi too late – Saradha given three months to refund investors", The Telegraph,
Mumbai, 24.04.2013.
276
RomitaDutta, "Saradha chairman SudiptaSen sentenced to three years in jail", Livemint,
21.02.2014.
277
Times Of India , 20.04.2013.
278
Times Of India , 20.04.2013.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 94

4.3.3 Satyam Computer Limited Scam 279-

B. Ramalinga Raju, the founder of Satyam Computers got into trouble after
he admitted to inflating the company revenue, profit and profit margins for every
single quarter over a period of 5 years, from 2003-2008. The amount embezzled by
him is estimated to be around Rs. 7,200 crore. 280 He and the company’s global head
of internal audit used a number of different techniques to perpetrate the fraud. Raju
created numerous bank statements to advance the fraud. Raju falsified the bank
accounts to inflate the balance sheet with balances that did not exist. He inflated the
income statement by claiming interest income from the fake bank accounts. Raju
also revealed that he created 6000 fake salary accounts over the past few years and
appropriated the money after the company deposited it. The company’s global head
of internal audit created fake customer identities and generated fake invoices against
their names to inflate revenue. He also forged board resolutions and illegally
obtained loans for the Company. 281

Soon after the disclosure by Raju, new Board members were appointed and
they started working towards a solution that would prevent the total collapse of the
firm. The Board’s goal was to sell the company within 100 days. The winning
bidder, Tech Mahindra, bought Satyam for $1.13 per share — less than a third of its
stock market value before Raju revealed the fraud—and salvaged its operations 282.
Both Tech Mahindra and the SEBI became fully aware of the fraud.

The investigation that followed the revelation of the fraud has led to charges
against several different groups of people involved with Satyam. Indian authorities
arrested Mr. Raju, Mr. Raju’s brother, B. Rama Raju, its former managing director,
Srinivas Vdlamani, the company’s head of internal audit and its Chief Financial
Officer (hereinafter referred to as “CFO”) on criminal charges of fraud. Indian

279
Available at www.ccsenet.org/ijbm International Journal of Business and Management, Vol. 5,
No. 10; October 2010 (Accessed on 15.02.2017).
280
Available at https://www.indiatimes.com/news/india/6-of-the-biggest-corporate-scammers-in-
india-251861.html (accessed on 11.03.2017).
281
S. Ramachadran, “Raju Brings Down Satyam, Shakes India,” Asia Times Online Ltd., 2009.
Available at www.a.times.com (Accessed on 15.02.2017).
282
S. S. Dagar, “How Satyam Was Sold the Untold Story: How the IT Services Major Was Rescued
against all Odds”, Business Today Reconstructs the Events of the 14 Crucial Weeks that Led up
to the Sale,” Business Today, 2009, pg. 25-42.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 95

authorities also arrested and charged several of the company’s auditors (PWC) with
fraud. The ICAI 283ruled that “the CFO and the Auditor were guilty of professional
misconduct.”

4.3.3.1 Corporate Governance Issues at Satyam

Raju admitted that the fraud which he committed amounted to nearly $276
million. In the process, Satyam grossly violated all rules of Corporate
Governance 284. The Satyam scam set an example of poor Corporate Governance
practices in India. It had failed to show good relation with the shareholders and
employees.

Corporate Governance issue at Satyam arose because of non-fulfilment of

obligation by the Company towards the various stakeholders. The following are as
under:
i. distinguishing the roles of board and management;
ii. separation of the roles of the CEO and chairman;
iii. appointment to the board;
iv. Directors and executive compensation; and
v. protection of shareholders rights and their executives.

The 2009 scandal highlighted the nefarious potential of an improperly

governed corporate leader. As the fallout continues, and the effects were felt
throughout the global economy, the prevailing hope is that some good can come
from the scandal in terms of lessons learned 285. Here are some lessons learned from
the Satyam Scandal:

a) Investigate All Inaccuracies:

The fraud scheme at Satyam started very small, but eventually growing into
$276 million. Indeed, a lot of fraudulent schemes initially start out small, with the
perpetrator thinking that small changes here and there would not make a big

283
ICAI, “ICIA Finds ex Satyam CFO, Price Waterhouse Auditors Guilty,” Outlook, 2009.
284
R. Chakrabarti, W. Megginsonet. al, “Corpo- rate Governance in India,” Journal of Applied
Corporate Finance, Vol. 20, No. 1, 2008, pg. 59-78.
285
B. Behan, “Governance Lessons from India’s Satyam,” Business Week, 16.01.2009.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 96

difference, and is less likely to be detected, but it had been revealed later on. So, it is
essentials to look into all inaccuracies.

b) Ruined Reputations:
Fraud does not just only bring disrepute to the Company but to entire Nation.
India’s biggest Corporate Scandal in memory threatened future foreign investment
flows into Asia’s third-largest economy and casts a cloud over growth in its once-
booming outsourcing sector. The news sent Indian equity markets into a tail-spin,
with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell. Due
to Satyam scandal, Indians business will come under greater scrutiny by the
regulators, investors and customers.

c) Corporate Governance Needs to Be Stronger:

The Satyam case is just another example supporting the need for stronger
Corporate Governance. All Public Companies must be careful when selecting
executives and top-level managers. Also, there is need to separate the role of CEO
and Chairman of the Board. Splitting up the roles, thus, helps avoid situations like
the one at Satyam.

4.3.2.2 Changes by SEBI after the Satyam Scandal

a) A record of all transactions with respect to the stock markets to be
maintained by the companies for inspection by SEBI.
b) Regular monitoring of all transactions by SEBI between investors,
shareholders, brokers and the company.
c) Special attention to large, unusual transactions by SEBI while inspection of
balance sheets.
d) Appointment of the CFO to be made by the Audit Committee after proper
assessment of their background, qualifications etc.
e) Appointment of Independent Directors on the Board to ensure the fair and
honest functioning of the company. No stock options to be given to these
directors and the salary should also be given in the form of reimbursements.
f) Several audit norms were introduced like the mandatory rotation of auditors/
audit firms every 5 years.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 97

g) Preventing auditors from undertaking any non–audit related to activities to

ensure that the auditors are true to their work and there is no conflict of
interest.
h) Adoption of the International Financial Reporting Standards by all major
companies in the preparation of various financial reports by the companies.
i) Interim Disclosure of balance sheet figures (audited balances of major
account heads) on a half-yearly basis.
j) Strict timelines for the submission of various financial reports to SEBI
throughout the year.

4.3.4 The C R Bhansali Case- Year 1995

The C R Bhansali from 1992 to 1996 286 ruled the Indian corporate sector as a
financial wizard. The above case took place in relation to establishment of CRB
Capital Markets, further he incorporated CRB Mutual Fund and CRB Share
Custodial Services. After establishing the above companies he borrowed the money
publicly inviting the money for fixed deposits, bonds and debentures. When he
received a good sum of money, the above money was transferred to companies,
which never existed. CRB Capital Markets raised Rs. 176 crore in just 3 years. CRB
Mutual Funds also raised Rs.230 crore, out of which Rs. 180 crore was borrowed
only through fixed deposits. Bhansali also successfully raised about Rs.900 crore
from the markets. The RBI cancelled the banking status of CRB, by cancelling the
registration certificate. 287

4.3.5 The Cobbler Case- Year 1996

The Government floated a scheme for low-interest loans and tax concessions
to Mumbai’s poorest cobbler, who worked for more than 10 hours a day and earned
less than US $2 288, thereby Sohin Daya, along with Kishore Signapurkar of Milano
Shoes and Rafique Tejani of Metro Shoes created several leather co-operative
societies which never existed in reality and in collusion with various businessmen

286
Available at http://scamsleaks.blogspot.in/2014/05/c-r-bhansali-scam.html (Accessed on
21.03.2017).
287
Available at https://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=13386 (Accessed on
25.05.2017).
288
Available at http://cobblerscam.webs.com/ (Accessed on 14.01.2017).
Existing Corporate Governance Practices Followed by Public and Private Companies in India 98

including politician had forged around $600 million, out of the above scheme. 289.
Sohin Daya created a fictitious cooperative society and availed crores of rupees from
different Banks 290. Kishore Signapurkar of Milano Shoes, RafiqueTejani of Metro
Shoes and Sachin Doya was arrested in this case. 291

4.3.6 The Dinesh Dalmia Case – Year 1998

In this case, the MD of DSQ Software Ltd. Dinesh Dalmia, was arrested by
CBI for his involvement in stocks scam of Rs. 595 crore. Investigation revealed that
Dalmia opted illegal means for making money though partly paid shares of DSQ
Software Ltd, in the name of New Vision Investment Ltd, UK and in the name un
alloted shares of Dinesh Dalmia Tech. Trust and shares of DSQ Software Ltd. had
never been listed in the stock exchange. It was unique case of this kind.

4.3.8 The Virendra Rastogi Case-Year 2002

Virendra Rastogi, the CEO of RBG Resources, was found involved in the
duty-drawback scam of approximately Rs.43 crore in India. He, along with his
brothers Subhash Rastogi, Ravinder Rastogi and Narinder Rastogi, exported
bicycles in the year 1995 to Russia and Hong-Kong, and heavily invoiced the value
of goods. This was done by them to claim the excess duty from customs. He was
also charged by the CBI for deceiving Banks worldwide.

4.3.9 The Abdul Karim Telgi Case- Year 2006

Abdul Karim Telgi obtained license from the government to print the stamp
papers and consequently, he began printing fake stamp papers. He bought special
machines to print fake stamp papers and gave bribe to get into the Government
security press in Nasik. The Telgi network spread across involving 176 offices, 13
states, 123 Bank accounts and a total of 1000 employees. This case involved a loss
of approx. Rs.171.33 crores as reported by the CBI.

289
Available at https://fileyourstory.wordpress.com/2012/04/24/the-great-indian-cobbler-scam/
(Accessed on 14.01.2017).
290
Available at http://cobblerscam.webs.com/ (Accessed on 14.01.2017).
291
Available at http://docshare01.docshare.tips/files/8674/86744517.pdf (Accessed on 14.01.2017).
Existing Corporate Governance Practices Followed by Public and Private Companies in India 99

4.3.10 The UTI Case

PS Subramanyam, the former UTI Chairman, M Kapur and S K Basu, the
executive directors of the UTI Bank, and Rakesh G Mehta, the stockbroker, were
charged by the CBI for their involvement in the UTI Scam 292. According to the CBI,
40,000 shares of Cyberspace, at a rate of Rs.830/- per share, were purchased by the
UTI, for a total of Rs. 3.33 crore, from Rakesh Mehta, when there were no buyers of
these shares. The conspiracy involved a loss of Rs. 32 crore. PS Subramanyam, M
Kapur, S K Kapur, Rakesh Mehta, and Arvind Johari who was the promoter of
Cyberspace, were arrested in connection with this case and imprisoned for three
years. 293

4.3.11 Ketan Parekh Scam- Year 2001

Parekh was involved in circular trading and stock manipulation through
1999-2001 in a host of companies. He borrowed money from Banks like Global
Trust Bank and Madhavpura Mercantile Co-operative bank and manipulated a host
of stocks popularly known as K-10 stocks. 294Parekh only dubious claim to fame was
in 1992 when he was accused in the stock exchange scam. He was known as the
'Bombay Bull' and had connections with movie stars, politicians and even leading
international entrepreneurs like Australian media tycoon Kerry Packer, who
partnered KP in KPV Ventures, a $250 million venture capital fund that invested
mainly in new economy companies. 176-point Sensex crash in March 2001, came as
a major shock for the Government, the stock markets and the investors alike. This
sudden crash prompted the SEBI to investigations into the volatility of stock
markets. SEBI also inspected the books of several brokers who were suspected of
triggering the crash. Meanwhile, RBI ordered some banks to furnish data related to
their capital market exposure. 295

292
Ibid.
293
Available at http://www.rediff.com/business/slide-show/slide-show-1-the-biggest-scams-in-
india/20101230.htm (Accessed on 08.02.2016).
294
Available at https://www.indiatimes.com/news/india/6-of-the-biggest-corporate-scammers-in-
india-251861.html (accessed on 11.02.2018).
295
This was after media reports appeared regarding a private sector bank having exceeded its
prudential norms of capital exposure, thereby contributing to the stock market volatility.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 100

The panic forced Bombay Stock Exchange President Anand Rathi's to resign,
as he was alleged to use some privileged information, which contributed to the
crash. The scam shook the investor's confidence in the overall functioning of the
stock markets. By the end of March 2001, at least eight people were reported to have
committed suicide and hundreds of investors were driven to the brink of bankruptcy.
The scam opened up the debate over banks funding capital market operations and
lending funds against collateral security. It also raised questions about the validity of
dual control of co-operative banks.

Ketan Parekh was arrested on March 30, 2001 for defrauding Bank of India
among other charges. The issue became debatable in the country, with intensive
media coverage and unprecedented public outcry. According to the sources, Ketan
Parekh did not have the money to buy large stakes. According to a report, 12 lakh
shares of Global in July 1999 would have costed Parekh around Rs 200 million. The
stake in Infosys would have costed him Rs 50 million, while the Zee and HFCL
stakes would have costed Rs 250 million each. Analysts held that Parekh borrowed
from various Companies and Banks for this purpose. His financing methods were
fairly simple. He bought shares when they were trading at low prices and saw the
prices go up in the bull market while continuously trading. When the price was high
enough, he pledged the shares with Banks as collateral for funds. He also borrowed
from Companies like HFCL. This could not have been possible out without the
involvement of Banks. Madhavapura Mercantile Cooperative Bank was main ally in
the scam. These included big names such as the State Bank of India, Bank of India
and the Punjab National Bank, all of whom lost huge amounts in the scam.
To revive the markets, SEBI imposed the restriction on short sales and ordered that
the sale of shares had to be followed by deliveries. It suspended all the broker
member directors of BSE's governing board. SEBI also banned trading by all stock
exchange presidents, vice-presidents and treasurers.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 101

A historical decision to ban the badla system in the country was taken,
effective from July 2001 and a rolling settlement system for 200 Group A
shares was introduced on the BSE. 296

Ketan Parekh was released on bail in May 2001. The duped investors could
do nothing knowing that the legal proceedings would drag on; perhaps for years, the
Ketan Parekh scam had given a set back to the Indian economy by at least a year.

4.3.11.1 Reasons for Fraud

The small investors who lost their life's savings felt that all parties in the
functioning of the market were responsible for the scams. They opined that the
broker-banker-promoter nexus, which was deemed to have the acceptance of the
SEBI itself, was the main reason for the scams in the Indian stock markets. SEBI's
measures were widely criticized as being reactive rather than proactive. SEBI's
market intelligence was very poor. Moreover, Ketan Parekh’s arrest was also not
due to the SEBI's timely action but as a result of complaints made by Bank of India.

4.3.11.2 Effect of Fraud

India has lost 200 billion. Many investors have committed suicide and
hundreds of investors were driven to the brink of bankruptcy. The Fraud shook the
investor’s confidence in the overall functioning of stock markets. Badla system was
banned.

4.3.12 Sahara Scam- Year 2010

Sahara Group chairman Subrata Roy and Vijay Mallya had a lot in common.
Sahara Group was accused of failing to refund over Rs. 20,000 crore to its more than
30 million small investors which it collected through two unlisted companies of
Sahara. In 2011, SEBI ordered Sahara to refund this amount with interest to the

296
Many exchanges were not happy with the decision of banning the badla system as they felt it
would rig the liquidity in the market. Analysts who opposed the ban argued that the ban
on badla without a suitable alternative for all the scrips, which were being moved
to rolling settlement, would rig the volatility in the markets. They argued that the lack of finances
for all players in the market would enable the few persons who were able to get funds from the
banking system - including co-operative banks or promoters - to have an undue influence on the
markets.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 102

investors, as the issue was not in compliance with the requirements applicable to the
public offerings of securities. 297

Sahara India floated two new companies – Sahara India Real Estate
Corporation Limited and Sahara Housing Investment Corporation in 2005 by
registering them under the Companies Act, 1956 with the relevant Registrar of
Companies in Kanpur and Maharashtra respectively. In the annual meetings held by
both the companies, a resolution was passed to raise funds through private
placement of optionally fully convertible debentures 298 from the friends, associates,
and family members of the Board of Directors. Funds were also to be raised through
the circulation of an information memorandum to a few trusted investors. The date
of commencement of issues of the debentures was 25th April, 2008 and 20th
November, 2009, respectively. SIRECL collected Rs. 17,656.53 crores between 25th
April, 2008 and 13th April, 2011. SHICL collected Rs. 6373.20 crores between 20th
November, 2009 and 13th April, 2011. Thus both the companies collected Rs.
24,029.73 crores from 30 million investors over a period of 3 years. In 2009, when a
red herring prospectus for Sahara Prime City (a real estate venture of Sahara India)
was submitted to SEBI for approval, SEBI noticed unusual fundraising activity in
the 2 firms SHICL and SIRECL. On 4th January, 2010, SEBI received a complaint
from a man, Roshan Lal, who alleged that “illegal means were being used by SHICL
and SIRECL in issuance of Optionally fully-convertible debentures (OFCD’s).

In 2009, when a red herring prospectus for Sahara Prime City was submitted
to SEBI for approval, SEBI noticed unusual fundraising activity in the 2 firms
SHICL and SIRECL. In January, 2010, SEBI received a complaint from Roshan Lal,
who alleged that “illegal means were being used by SHICL and SIRECL in issuance
of OFCD’s.” SEBI launched an investigation against Sahara, inquiring into the
fundraising activities of SHICL and SIRECL along with investor information.

297
Available at https://www.indiatimes.com/news/india/6-of-the-biggest-corporate-scammers-in-
india-251861.html (accessed on 11.01.2018).
298
Private Placement of Shares is defined as an issue of invitation for purchase of shares sent
individually to each investor and not an open invitation to the public for purchase of securities.
Private Placement of securities generally happens when individual invitation to purchase
securities is sent to 50 or less people.
Existing Corporate Governance Practices Followed by Public and Private Companies in India 103

After finding Sahara guilty, SEBI passed an interim order, ordering the payment of
Rs.24, 000 crores plus 17% interest to 30 million investors. The SEBI order was
passed by the Securities Appellate Tribunal and subsequently the Supreme Court. 299
Detecting the Sahara Scam is a massive achievement for SEBI and is a testament to
the growth of SEBI in the last 3 decades. However, the Sahara Scam is also the
biggest securities scam in India. It resulted in 30 million investors losing their hard
earned money. The government has taken steps to tighten SEBI’s hold on the
securities markets and has bestowed more powers on SEBI.

Mr. Subrata Roy was arrested on 28 February 2014 and his proposal
to settlement of the matter was rejected by the Court and SEBI. 300The Supreme
Court while confirming the findings of the Securities Appellate Tribunal (SAT) has
further asked SEBI to probe into the matter and find out the actual investor base who
have subscribed to the Optionally Fully Convertible Debentures issued by the two
group companies SIRECL and SHICL. Shareholders of SIRECL approved a
resolution under section 81(1A) for raising funds by issuance of Optionally Fully
Convertible Debentures on private placement basis. The Company filed Red herring
prospectus with the ROC and it specifically stated that it did not intend to list the
shares on any Stock exchange. The main intention of raising funds was to finance
infrastructural activities. It circulated the Information Memorandum to friends,
associate companies, Workers/employees. It collected huge sums of money
amounting to about 19400 crores. In a similar way, its other group company SHIC
also raised funds.

The Supreme Court laid further emphasis on the legislative intent and the
statement of objectives for the enactment of SEBI Act and the insertion of Sec 55A
in the Companies Act to delegate special powers to SEBI in matters of the issue,
allotment and transfer of securities. The Court held that as per Sec 55A of the
Companies Act, so far matters relate to issue and transfer of securities and non-

299
This was the first time in the history of SEBI that it had caught such a huge scam on its own.
SEBI’s vigilance and alertness, the expansion of its powers and its strong investigative instinct
was revealed in this scam.
300
Available at https://www.indiatimes.com/news/india/6-of-the-biggest-corporate-scammers-in-
india-251861.html (Accessed on 18.01.2018).
Existing Corporate Governance Practices Followed by Public and Private Companies in India 104

payment of dividend, SEBI has the power to administer in the case of listed public
companies and in the case of those public companies which intend to get their
securities listed on a recognized stock exchange in India.

List of Changes made in SEBI after the Sahara Scam:

a) Before the Sahara Scam, the term “private placement” had not been defined
in the Companies Act. Only those instances where an offer would not qualify
as a “public offer” had been defined. On SEBI’s recommendation, Section 42
was introduced in the Companies (Amendment) Act, 2013. It defined private
placement “as an issue of securities by a listed or an unlisted Public
Company to 49 or less people where individual invitations to buy are sent to
the investors.” As soon as the number of investors rose to 50 and beyond, the
issue of shares would be declared a public offer and would have to be
verified and approved by the SEBI.
b) The government gave SEBI the power to regulate any money pooling worth
Rs.100 crores or more.
c) The government had given SEBI the authority to cease the assets of the
people who do not comply with the “seize and search” orders issued by the
SEBI Chairman.
d) The government has instructed SEBI to create a new law to control illicit
investment schemes. SEBI is in the process of drafting this law and sending
it to the required authorities for approval.
e) SEBI now has the right to retrieve and investigate the telephone records, etc.
with respect to any securities investigation.
f) Chit funds, Nidhi schemes and housing schemes (collective investment
schemes) that are not regulated by any particular authority and have a corpus
greater than Rs.100 crores have to be regulated by SEBI and follow all
regulations as deemed fit by SEBI.

4.3.13 Vijay Mallya Scam- Year 2017

Business tycoon Vijay Mallya is in the news for failing to repay the nearly
Rs. 7,000 crores to various banks and his subsequent fleeing from India. It is still
unclear whether Mallya will be returning to India, or how the banks will recover the
Existing Corporate Governance Practices Followed by Public and Private Companies in India 105

huge amount which he owed them if he does not come back. While the Mallya
episode is being described as the biggest fraud in Indian history. 301

4.3.14 Ram Sumiran Pal, Speak Asia

Speak Asia was an online trading company founded by Ram Sumiran Pal
and his brother. Pal and his associates duped at least 24 lakh investors for Rs 2,200
crore in the scam extending to Singapore, Italy, and Brazil, among others. They took
over or set up multi-level marketing companies registered in foreign countries
attracting investments due to their global profile. There were some buyouts in Brazil
as well. These were later used to launder money. The investigative agencies soon
realised there were more people and other entities involved in a global internet-
based operation that spread as far as Holland and Brazil. Involvement of Pal and
others — along with other entities like Admatrix and Seven Rings International —
who had floated companies in Europe and South America also surfaced. 302

Conclusion: All these corporate frauds have negative impact on the corporate
structure and the economy of the country gets adversely affected. It shatters the
credibility of stakeholders and also ruins the reputation and financial soundness of
the corporate structure 303. One of the mechanism that can ensures the soundness of
Company by preventing corporate fraud are the rule of Corporate Governance and
disclosure mechanism but nowadays it also need to be strengthened and stressed
upon in the global changing corporate regime. Indian corporate need to Perform,
Transform and Reform, so that they can open up new vistas of global opportunities
which would in turn benefit our country and its people. 304

301
Available at https://www.indiatimes.com/news/india/6-of-the-biggest-corporate-scammers-in-
india-251861.html (Accessed on 18.01.2018).
302
Ibid.
303
Ibid.
304
The Vice President of India, Shri M. Venkaiah Naidu, he was addressing the gathering after
giving away the Mint’s Corporate Strategy Awards, in Mumbai today.
 CHAPTER 5
ROLE OF GOVERNMENT AS SHAREHOLDER

5.1 Evolution of Public Sector Undertakings

5.2 SOEs in the World Economy
5.3 State-Owned Enterprises
5.4 Role of SOEs
5.5 Need for Corporate Governance in SOEs
5.6 Issues and Challenges of Corporate Governance in PSUs
5.6.1 Conflict between the Dominant Shareholder and Minority
Shareholders
5.6.2 Issues of Appointment of IDs
5.6.3 To Establish SOE Boards that is Independent and Qualified
5.6.4 Issues in Auditing
5.6.5 Non-Compliance with Board Independence
5.6.6 Roles and Responsibilities of the State as an SOE Owner
5.6.7 To Instil an Organizational Culture of Integrity in SOEs
5.6.8 Subsidies: Sacrificing Minority Shareholders
5.7 OECD Guidelines for SOE Corporate Governance
5.8 Shareholders
5.9 Corporate Governance of PSUs/ SOEs
5.9.1 Reforms
5.10 Suggestions