Corporate Governance


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Presented at the ICAI-EIRC on 15th Feb, 2012

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Corporate Governance

  1. 1.  IT company Mahindra Satyam have filed a lawsuit against founder and former Chairman of Satyam Computer, Ramalinga Raju along with some ex-employees and former auditor Price Waterhouse in Hyderabad court seeking damages for committing fraud, breach of fiduciary responsibility, obligations and negligence in performance of duties. Top corporate lawyers have termed this as “first of its kind” . According to media reports, the firm has also sought damages, which some people estimate could be as high as $200 million.
  2. 2.  Leading corporate tax lawyer and Supreme Court advocate, Mr H.P. Ranina, told Business Line that the main reason behind the suit seems to be the new managements (led by the Mahindra Group) interest in recouping the losses incurred by the company due to the alleged accounting fraud. Since it is a civil suit, a final decision could take at least 5-6 years due to the long list of pending civil cases in the respective civil courts, he said.
  3. 3.  Significantly, the other fall-out would be on directors. “Due to the possibility of such civil suits, not many people will now be ready to take up the offer of joining the board of companies as directors as these liabilities will be much more than the negligible amount that they are offered as fees,”. Another corporate lawyer, speaking on condition of anonymity, said the case seems to be ‘unprecedented, adding that nothing in law stops the company from ensuring that it recovers all its money from the ‘fraudsters.
  4. 4.  The scale of irregularities is indeed a shock from which the financial world will take some time to recover. Here was a company with more than 50,000 employees, offices in more than 60 countries, a multi- layered professional management, more than 650 clients (one third of which were Fortune 500 companies), a pedigreed Board (till very recently), a company that was very well tracked by sell-side and buy-side analysts, a stock listed in multiple global exchanges and to top it all, one that had Price Waterhouse as its auditor. For such a highly visible company with a seemingly real business, the scale of the fraud looks too unpalatable to digest.
  5. 5.  The Companies Bill, which seeks to replace a half-a-century-old Act, will be presented in parliament in the ongoing budget session, said the finance minister. The new Companies Bill promises greater share-holder democracy and stricter corporate governance norms. The Bill introduces for the first time in India the concept of class action suits, which would empower investors to sue a company for “oppression and mismanagement” and claim damages. The Bill also proposes to tighten the laws for raising money from the public. There will be a single forum for approval of mergers and acquisitions, whether domestic or with foreign entities. Also, the procedure for merger of holdings and wholly-owned subsidiaries will be shortened. It also seeks to prohibit insider trading by company directors or key managerial personnel by treating such activities as a criminal offence. Listed companies to have mandatory 33% independent directors and formation of a One Person Company will find its way, while empowering the government to have a simpler compliance regime for small companies.
  6. 6. Definition of Independence The definition of an ID has been considerably tightened. For example, if a director is a chief executive of an NGO that receives funding from the company to a certain extent, the person would not qualify as an independent director. Moreover, the definition now includes positive attributes of independence (that was not the case under clause 49): the candidate must be “a person of integrity and possess the relevant expertise and experience” in the opinion of the board. The Central Government is also vested with the power to prescribe qualifications for IDs. Every ID is also required to declare that he or she meets the criteria of independence.
  7. 7. Remuneration Under the Bill, IDs are entitled only to fees for attending meetings of the board, and possibly commissions within certain limits. The Bill expressly disallows IDs from obtaining stock options is companies. Attempts to achieve a proper balance may be fraught with difficulties under the present dispensation.
  8. 8. Liability In order to balance the extensive nature of functions and obligations impose on IDs, the Bill seeks to limit their liability to matters directly relatable to them. The Bill limits the liability of an ID “only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.” This again seems to be a reaction to specific instances in the recent past where IDs were subject to legal action for no fault of their own, as evident from the Nagarjuna Finance episode that occurred in 2009.
  9. 9. It becomes a prime focus forthe share holders. We need tobuild corporate governance inthe country, otherwise there isno future,” he warned.
  10. 10.  He said the government, for the first time, was working on developing corporate rating index. “We need to get to work in new area. We are working on our own Corporate Rating Index.” At present, India is following the Corporate Rating Index developed in other countries. According to him, India is ranked 163 in the Global Corporate Rating Index.
  11. 11. In this context, Prof. O’Brien spoke of the needto shift from:a. government to responsibilityd.finally to integrity, a process which requiresinter-disciplinary collaboration and anapplication of behavioural economics.
  12. 12.  The unravelling of the Satyam scam, India’s fourth largest IT company, has put a big question mark on not only the role of corporate entities but also the urgent need for re-examining the issue of corporate governance and the role of the company auditors. Clearly, with competitiveness and the need for rapid growth becoming crucial better corporate governance has become imperative. Plainly, at Satyam the governance framework has not been effectively implemented and nor have the auditors been judicious in examining the company accounts.
  13. 13.  In fact, Cadbury Chief Sir Adrian Cadbury captured the spirit of corporate governance by stating: “Corporate governance is holding the balance between economic and social goals and between individual and communal goals.
  14. 14.  Take the case of Nagarjuna Finance where its head was eventually arrested but that did not mean that the over 85,000 depositors would recover their savings of Rs 100 crores. At Duncan Industries too, the depositors are running from pillar to post trying to make sense of the repayment scheme which is intended to fool them and inordinately defer payment.
  15. 15.  SEBI has been seriously considering the idea to float a public body to carry out the review audit of listed companies and guidelines in this regard are expected shortly. According to SEBI sources the investor protection funds would be used to carry out this review audit. The review audit could also be funded by the companies themselves but the independent body would empanel auditors with a good track record for carrying out such audit.
  16. 16.  According to a report prepared by the Pune-based Indiaforensic Consultancy Services (ICS) at least 1200 companies listed on the domestic stock exchanges have forged their financial results in recent times. The ICS study has alleged that such improper accounting includes deferring revenue and inflating expenses. The figure includes 20-25 firms whose stocks make the benchmark Sensex. Obviously keeping this in view, the Government has decided to inspect the books of as many as 150 companies under section 209A of the Companies Act to review whether the accounts are in order.
  17. 17.  The Bribery Act 2010 into force on 1 July 2011, amends and reforms the UK criminal law and provides a modern legal framework to combat bribery in the UK and internationally.
  18. 18.  The Bribery Act creates the following offences: Active bribery: promising or giving a financial or other advantage. Passive bribery: agreeing to receive or accepting a financial or other advantage. Bribery of foreign public officials. The failure of commercial organisations to prevent bribery by an associated person (corporate offence).
  19. 19.  Penalty Under the current law imprisonment for up to seven years with unlimited fine will increase under the Bribery Act to a maximum of 10 years imprisonment. Jurisdiction The scope of the law is extra-territorial. Under the Bribery Act, a relevant person or company can be prosecuted for the above crimes if the crimes are committed abroad. Application The Bribery Act applies to UK citizens, residents and companies established under UK law. In addition, non-UK companies can be held liable for a failure to prevent bribery if they do business in the UK.
  20. 20.  A company or corporate entity is culpable for board-level complicity in bribery, including bribery through intermediaries. There is also personal liability for senior company officers that turn a blind eye to such board-level bribery.
  21. 21. Vodafone International Holdings BVvs. Union of India (“theVodafonecase”).Apt Example of Non Lifting of Corporate Veil