IIBF Mumbai

AMP XII Batch 2023-24

Name: Komal Katari
Date:
Roll No.
Assignment Topic: Write on 3 cases of failed corporate governance

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 Table of Contents
Introduction................................................................................................................................3

Discussion of 3 cases of failed corporate governance................................................................3

Conclusion..................................................................................................................................8

References..................................................................................................................................9

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Introduction
It is important to understand the term ‘Corporate Governance’ before proceeding with
the cases. Any existing legal business entity is referred to as "corporate," and the
frameworks or regulations associated to oversee it are referred to as "government." In
a nutshell, it is a framework for managing and boosting corporate success in order to
increase long-term value and safeguard shareholders' interests. In the UK, the first
instance of corporate governance failure occurred in 1981 with Bank of Credit and
Commerce International (Larcker, and Tayan, 2020). The idea of corporate
governance emerged in India in the middle of 1996 as a result of business and industry
deregulation and economic liberalisation. The Confederation of Indian Industries
Code (CII) was a significant turning point in the Indian industry's history in 1996
when it launched the first initiative and advanced corporate governance. In this study
three cases of failed corporate governance are going to be discussed.

Discussion of 3 cases of failed corporate governance

The main goal of corporate governance in the banking industry is to safeguard the
needs and interests of all of its shareholders. To protect their funds and ensure that
there is no illicit behaviour occurring in the bank, corporate governance is necessary.
It discusses regulators, shareholders, managers, boards of directors, and other relevant
topics.
Case study 1: PNB and NIRAV MODI SCAM
Issues
In a criminal complaint filed with India's federal investigative agency on January 29,
2018, PNB (Punjab National Bank) accused three companies and four individuals,
including billionaire jeweller Nirav Modi and his uncle Mehul Choksi, the managing
director of Gitanjali Gems, of defrauding PNB and causing a loss of 2.8 billion rupees
($43 million). The bank revised the amount involved in the scam to 113.94 billion
rupees ($1.77 billion) in a regulatory filing on February 14. It said that this figure was
established following additional inquiry at its Brady branch in Mumbai. This scam
was committed in 2011 by Nirav Modi, who used a Letter of Undertaking (LOU) from

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Punjab National Bank to deceitfully obtain funds from many public and private sector
banks totaling Rs. 11,400 crore. There were different members involved in the scam
such as:
● Nirav Modi: The main suspect in this scam is Nirav Modi, proprietor of the
Nirav Modi company, Diamond RU.S.; Stellar Diamond and Solar Exports.
● Ami Modi: The spouse of Nirav Modi.
● Nishal Modi: The brother-in-law of Nirav Modi.
● Mehul Choksi: Nirav Modi's uncle, Mehul Choksi is the proprietor of the
Gitanjali Group.
● Manoj Kharat, a clerk, and retired deputy manager Gokul Nath Shetty who
worked for PNB.
Analysis of the issue
Employees of PNB issued fictitious Letters of Undertakings (LOUs), which may have
been used in fraud. When using SWIFT directly, the two PNB workers were not
paying attention to the CBS, the fundamental banking system. Details like how those
two PNB workers issued LOUs without authorization for seven years were included in
the FIR.
One of them later retired, and a new employee took over in his position. When
corporate officials requested new LOUs from PNB in January, the newly appointed
PNB officer requested collateral security (Suman, and Singh, 2021).
The corporate authorities stated that throughout the previous seven years, the PNB
manager had never asked for this. The bank is now receiving signals that something is
amiss. The new bank officer had concerns about the issuing of LOUs throughout the
previous seven years, therefore he thoroughly investigated the issue
(delhipostnews.com, 2024).
Solution taken
Following the PNB official's initial record-scanning efforts, which yielded no such
transactions, a complaint was lodged with the CBI.
Nirav Modi's company asked the bank to issue another LOU once more, but the
official turned it down, citing the requirement that the business maintain collateral on

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file. Modi's company countered that no such funds were held on margin for the first
LOU.
Following the PNB official's initial record-scanning efforts, which yielded no such
transactions, a complaint was lodged with the CBI. Following are the Ethical Issues
Involved in the case-
•Not following corporate governance norms
•Tempering the financial data
•Misleading the bank as well as the government
•Putting self-interest first (Arora, and Singh, 2020)
Clearly, the incident denotes how corporate governance definitions have been
breached and loopholes have been given to the fraudsters.
Summary
The jeweller and diamond dealer Nirav Modi was charged with defrauding the Punjab
National Bank out of more than $2 billion. The bank allegedly provided fake letters of
undertaking to Modi and his friends, which they then used to apply for loans from
foreign banks and the incident clearly had shown a case of failed corporate
governance where the bank itself is not able to protect the assets.
Case study 2: YES bank scandal
Issues
The intense drama that followed Yes Bank started when the stock was marketed
alongside companies like HDFC Bank, Kotak Mahindra Bank and traded at a price to
book more than 5. Yes Bank's market value was at rs 1 lakh crore at its peak.
When other organisations dug deeper into the bank's records, creeks began to emerge
in this dream run. The bank has been lending excessively and held the largest share of
loans to financially troubled businesses, including the Anil Ambani Group and the
Essel Group. The likelihood of a strained account not accepting a cheque from Yes
Bank was quite low (elearnmarkets.com, 2024). Finally, as promised, Rana Kapoor
was the go-to person for every distressed borrower.
A hint of the poisoning was sent to the banking regulator when the bank reported very
different NPA numbers than those found in the Asset Quality Review (AQR)
programme. A more than 300% discrepancy was recorded by Yes Bank. Gross non-

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performing assets (NPAs) recorded by the bank for FY 2016–17 was 2,019 crores.
The amount increased to 8,373 crores, according to RBI estimates. Put simply, there
was a five percentage point underreporting of the bank's non-performing assets.
Analysis of the situation
When a company's management or board of directors disregard moral and legal
obligations, it can result in poor decision-making and a lack of accountability. This is
when corporate governance fails. The following are some circumstances in which
corporate governance did not work for the chosen bank:
Lack of transparency: Creditors and other stakeholders may become less trusting of
the bank if it fails to disclose sufficient information about its business practices,
financial results, or hazards. Bank’s reputation and financial performance may suffer
as a result of stakeholders finding it difficult to make educated decisions regarding the
company's future prospects due to this lack of transparency.
Conflicts of interest: When a bank’s management or board of directors' interests do
not coincide with those of the business or its stakeholders, it may result in actions that
put short-term gain ahead of the business's long-term objectives. This may lead to
subpar financial results, harm to the business's image, and a decline in investor trust.
Poor risk management can result in large financial losses or other unfavourable effects
when a business does not have sufficient procedures in place to identify, evaluate, and
manage risks. In this case, poor risk management occurred as the bank gave hefty
amounts of loans to the business that were not performing well.
Solutions taken
The bank tried everything to minimise the problem, rather than closing the gaps. It
continued by pointing out that the majority of these accounts had previously been
repaid, that some had been upgraded due to good account behaviour, that some had
been sold to asset reconstruction companies, or ARCs. The financial impact was
reduced from the previously reported disparity of 26,355 crore to 485 crore.
Summary
CEOs such as Chandna Kochhar at ICICI and Shikha Sharma at Axis had been
receiving harsh punishments from the Mint Street Sheriff. When he was turned down
for a three-year extension in August 2018, Rana Kapoor suffered a similar fate.

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Although Kapoor had been scheduled to retire on January 31, 2019, the day this news
broke, the stock fell precipitously. This exclusively created an instance of corporate
governance failure and justifies the studies aim.
Case study 3: ICICI bank
Issue
The 2016 complaint by an investor about an alleged quid pro quo arrangement
between the bank's CEO's immediate family members and the Videocon group—
which received a Rs. 3,250-crore loan from the bank—is the source of ICICI Bank's
problems.
The bank's chairman of the board of directors personally looked into this "conflict of
interest" issue two years before when it emerged in the public eye this year and
discovered nothing abnormal (Wasan, P. and Mulchandani, K., 2020).
The question of whether the bank had neglected to provide sufficient disclosures about
its contacts with the borrower, who is now in default, and a company connected to the
CEO came to light when the Central Bureau of Investigation and subsequently the
stock market regulator SEBI intervened.
Analysis of situation
The Bombay High Court ordered the police department to treat cases involving
investors and unit owners who lost their hard-earned money to dishonest builders as
crimes and to file complaints against the builders in issue.
When equity investors lose money as a result of poor corporate governance, the same
rule ought to be followed.
In order to safeguard equity capital investors in the stock market, additional legislation
and regulations are needed, similar to the Real Estate (Regulation and Development)
Act (RERA), 2016. Nepotism, favouritism, conflicts of interest, quid pro quo,
transparency, and lack of accountability are thus problems that the policy needs to
solve.
Solutions undertaken
The bank conducted an internal examination and found no evidence of a substantial
lapse, prompting the board to appoint a committee to look into the allegations.

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The internal assessment conducted by the bank raises concerns as the report was never
made public and there was no disclosure of the conflict of interest to SEBI.
Only a portion of the Rs 3,250 crore that Videocon was backed by a group of banks
received from ICICI. Regarding this matter, SEBI has fined ICICI Bank and the CEO
for failing to disclose the conflict of interest. No justification has been provided to
SEBI for more than two months (iasparliament.com, 2024). Rumour has it that the
CEO and ICICI Bank may apply to SEBI for a settlement in order to compound their
crimes.
Summary
The stakeholders are not shielded from bad corporate governance, despite the
regulatory bodies in India having taken major steps to improve it. Self-interest, lack of
business ethics and transparency to some extent contributed to the failed corporate
governance of the story.

Conclusion
Failures in corporate governance can affect businesses, stakeholders, and the economy
as a whole in a number of ways. The study has highlighted three cases and these
include some of the outcomes such as financial loss, reputational mange, loss of
employment and loss of regulations. Investors and other stakeholders may suffer large
financial losses as a result of corporate governance lapses. This can happen if a
company's management participates in dishonest or immoral business practices, which
can result in financial mismanagement, lower profitability, or even bankruptcy.
Moreover, ineffective corporate governance can undermine stakeholders' faith in a
company and harm its reputation. This may make it harder for the business to draw in
new clients, financiers, or staff members and may cause its total worth to drop. In
addition it can be said that Violations of corporate governance may lead to fines,
penalties, or even criminal prosecutions. The company's financial performance and
reputation may suffer even more as a result. Lastly, inadequate corporate governance
can lead to job or employment losses, especially if a business files for bankruptcy or is
compelled to reduce staff due to financial difficulties or legal action. Taking the right
action at the right time is one of the potential solutions to apply.

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References
Xia, L., Gao, S., Wei, J. and Ding, Q., 2022. Government subsidy and corporate green
innovation-Does board governance play a role?. Energy Policy, 161, p.112720.
Lund, D.S. and Pollman, E., 2021. The corporate governance machine. Colum. L.
Rev., 121, p.2563.
Larcker, D. and Tayan, B., 2020. Corporate governance matters. FT Press.
Almaqtari, F.A., Al-Hattami, H.M., Al-Nuzaili, K.M. and Al-Bukhrani, M.A., 2020.
Corporate governance in India: A systematic review and synthesis for future research.
Cogent Business & Management, 7(1), p.1803579.
Suman, S. and Singh, S., 2021. Corporate governance mechanisms and corporate
investments: evidence from India. International Journal of Productivity and
Performance Management, 70(3), pp.635-656.
Arora, N. and Singh, B., 2020. Corporate governance and underpricing of small and
medium enterprises IPOs in India. Corporate Governance: The International Journal
of Business in Society, 20(3), pp.503-525.
Mishra, A.K., Jain, S. and Manogna, R.L., 2021. Does corporate governance
characteristics influence firm performance in India? Empirical evidence using
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18(1), pp.71-82.
Wasan, P. and Mulchandani, K., 2020. Corporate governance factors as predictors of
earnings management. Journal of General Management, 45(2), pp.71-92.
Vicente-Ramos, W., Reymundo, K., Pari, L., Rudas, N. and Rodriguez, P., 2020. The
effect of good corporate governance on banking profitability. Management Science
Letters, 10(9), pp.2045-2052.
iasparliament.com, 2024. Available at: https://www.iasparliament.com/current-
affairs/failure-of-corporate-governance-icici-case-study [Accessed on 05/02/2024]
elearnmarkets.com, 2024. Available
at: /https://www.elearnmarkets.com/school/units/corporate-governance/landmark-
corporate-governance-failures-in-india-yes-bank#:~:text=It%20is%20alleged%20that
%20Mr,for%20a%20long%20long%20time. [Accessed on 05/02/2024]

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delhipostnews.com, 2024. Available at: https://delhipostnews.com/pnb-scam-
corporate-governance-failure/ [Accessed on 05/02/2024]

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