Satyam has been one of the most thought provoking corporate scams that India Inc. has seen in its recent history. To follow up, the government has come up with substantial changes in its status to rein in the Rajus of the country. Find out more in the story.
The sentencing of Ramalinga Raju and others by the Special Court in Hyderabad this month, six years after the Satyam Scam came to light, has once gain brought the matter of corporate governance on the discussion table. The Satyam scandal was an eye opener for the regulators and watch dog. Touted as India’s Enron, the Satyam led to revealing how deep was the rot in the system of governance in the big business houses in India. The poster boy of India’s corporate was neck deep in some of the worst corporate malfeasance. It was the scandal that shook the conscience of the nation.
India was not new to corporate scandals when Ramalinga Raju confessed to cooking books, inflating staff count and creating fake bank accounts. India had been witness to many corporate scandals and financial misappropriation. There were the cases such as Harshad Mehta securities scam, preferential allotment scam in 1995, UTI Scam in 1996, Ketan Paekh Scam in 2001, IPO Scam in 2005. But the Satyam scam in 2009 was the tipping point in the corporate wrongdoing in India. Interestingly, scams have surfaced even after Satyam took place. In the recent past, we have had a spate of scams, such as CWG Scam, 2 G scam, apart from the Saradha Group Financial scam in 2013, NSEL scam in 2013, Sahara scam, which have completely shaken the trust of the shareholders and investors.
Scams have taken place outside India from time to time too. USA, which has a market based financial systems, has been witness to may scams in the past. The mother of all financial scandals, the Enron Scandal, took place in USA in 2002. US Government in no time passed one of the strictest law – Sarbanes Oxley Act, in 2002 to make the corporate world responsible and accountable to the investors and government. The Sarbanes–Oxley Act introduced sweeping corporate law changes relating to financial reporting, internal accounting controls, and personal loans from companies to their directors, whistle blowing and destruction of documents. In addition, Sarbanes Oxley severely restricts the range of additional services that an audit firm can provide to a client. There are increased penalties for directors and professionals who have conspired to commit fraud.
The importance of corporate governance lies in the fact that it attempts to deal with conflicts of interest between the interested parties in an organization. Way back in 1998, Confederation of Indian Industry (CII) took the first institutional initiative to promote corporate governance in India by recommending “Desirable Corporate Governance Code”. The code was voluntary in nature and was applicable to all companies.
In 1999, the market regulator, Securities and Exchange Board of India (SEBI) constituted a committee under the chairmanship of Kumar Mangalam Birla to study the prevailing corporate governance standards in India and to give its recommendation keeping in view of the emerging global standards. After the downfall of Enron in USA, Government of India, immediately in 2002, constituted a committee under the chairmanship of Naresh Chandra to study and recommend the auditor – client relationship and the role of independent directors.
In 2002, SEBI again constituted a committee under the chairmanship of Mr. Narayana Murthy to study the corporate governance compliance by the listed entity in India and to recommend the best global practices.
In order to plug the loopholes in the law and bring about a more transparent system of corporate governance, the government of India changed the Companies Act, 1956 and brought about a new Companies Act, 2013, with many changes and amendments. New Companies Act, 2013 provides a comprehensive provisions pertaining to corporate governance. The changes in law are aimed at ensuring higher standards of transparency and accountability, and seek to align the corporate governance practices in India with global best practices. It has introduced significant changes in the composition of the board of directors of a company. The changes will definitely have far-reaching implications that are set to significantly change the manner in which India Inc. Operates
In the new Act, the emphasis has been placed on ensuring greater independence of independent directors. The overall intent is to ensure that an independent director has no pecuniary relationship with, nor is he provided any incentives (other than the sitting fee for board meetings) by it in any manner, which may compromise his / her independence. As per the provisions, Independent directors are unlikely to be exempt from liability merely because they have fulfilled the duties specified in the Act, and should be prudent and carry out all duties required for effective functioning of the company.
The new Act empowers independent directors with a view to increase accountability and transparency. Further, it seeks to hold independent directors liable for acts or omissions or commission by a company that occurred with their knowledge and attributable through board processes.
Under the new Act, there must be a woman director in the board, and an auditor cannot perform non-audit services for the company and its holding and subsidiary companies. This provision seeks to ensure that there is no conflict of interest, which is likely to arise if an auditor performs several diverse functions for the same company such as accounting and investment consultancy services. Auditors also have the duty to report fraudulent acts noticed by them during the performance of their duties.
Thus, the Companies Act, 2013 has brought about greater standards of corporate governance, by imposing higher duties and liabilities for directors, independent directors, auditors and other officers of the company.
In 2014, Sebi reviewed the provisions of the Listing Agreement in this regard with the objectives to align with the provisions of the Companies Act, 2013, adopt best practices on corporate governance and to make the corporate governance framework more effective. The revised Clause 49 is applicable to all listed companies with effect from October 01, 2014.
Under the revised Caluse, there should be more disclosures about the remuneration of senior executives and a system to evaluate the performance of independent directors and other board members. The market regulator, as per the Companies Act, 2013, has also reiterated that there should be at least one woman director on the which will lead to some gender diversity, critical in some way for a better corporate compliance culture.
There will be a compulsory whistle-blower mechanism in every company. This mechanism should also provide for adequate safeguards against victimization of director(s) / employee(s) who avail of the mechanism and also provide for direct access to the Chairman of the Audit Committee in exceptional cases. The clause also prohibits offering stock options to independent directors, and that companies should have separate meetings of independent directors and must put in place a stakeholders’ relationship committee.
A person can be an independent director in seven companies at the most and three in case he or she is already a whole-time member in a listed company. The Listing Agreement has capped the total tenure of an independent director to two terms of five years each. However, if a person who has already served as an independent director for five years or more in a listed company as on the date on which (this amendment) becomes effective, he shall be eligible for appointment for one more term of five years only. The Clause makes regulations for related-party transactions stricter. The companies should seek prior approval of the audit committee for all material related-party transactions. Besides, they should also seek the nod of shareholders for all material related-party transactions through a vote on a special resolution in which all the related parties should not participate. The Caluse 49 of the Listing Agreement also says that the chiefs of nomination and renumeration committees will be independent directors on the board of the companies. The Listing Agreement also wants companies to constitute a Risk Management Committee and directs the board to define the roles and responsibilities of the Risk Management Committee and to delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit.
Though there will appeals in the higher court and the case might reach the Supreme Court of India, the sentencing of Ramalinga Raju and others has already sent signals to the Indian Inc that laws will not spare them for their wrongdoing. With stringent laws in place, the companies and its management would be cautious enough to put in place their own mechanism for compliance. This sentencing will make independent directors more cautious of their role on the board and they will now think twice before clearing any proposal which is against the shareholders’ interests. According to experts, reported in the media, a greater degree of scepticism amongst board members and the practice of challenging management assertions can bring in healthy debates of key issues facing the business. They say that independent directors should take active part in decision-making process and the practice of independent challenge to management comments may help in identifying critical issues earlier than they would normally come to light. With a new Companies Act and the changes made in the Clause 49 of the Listing Agreement, the government has put in place a robust mechanism to catch those flouting the rules.
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