UNIT 4 INDIAN SCENARIO, PUBLIC POLICIES SEBI, CORPORATION IN GLOBAL

SOCIETY

This unit focuses on the framework of corporate governance in India, public policies, the role of
SEBI, and corporations within the global society. Corporate governance is currently a significant
issue, partly because good governance has become a casualty at various levels. Corporate
governance involves principles, ethics, values, morals, rules, regulations, and procedures. It
establishes a system where directors are entrusted with duties and responsibilities concerning
the company's affairs. Key aspects include Honesty, Disclosure, Transparency, Sustainability,
and Responsibility.

Historically, the philosophy of governance and ethics is not new, being deeply rooted in Indian
tradition. However, businesses today often pursue exponential growth and profits, sometimes
overlooking the ethical means of generating returns for shareholders and stakeholders, which
can damage reputation and goodwill.

Global Corporate Failures

Corporate failures in the United States, similar failures in Australia (HIH, One.Tel), and other
countries have spurred increased regulatory interest in corporate governance. Learning from
corporate failures, both internal and external, is a necessary aspect of good governance.
Financial scandals have consistently been a major catalyst for changes in company law. These
scandals often indicate that auditors have not met expected standards. It's important to
distinguish between audit failures and business failures, as not all business failures are due to
audit failures, which may be caused by external factors.

Several major corporate failures highlight critical governance issues:

●​ Enron: This Texas-based energy trading company case shook the auditing profession
and caused a crisis of confidence in auditors and the reliability of financial reporting.
Enron became a byword for company fraud. The company used a complex accounts
structure to hide huge debts behind fraudulent off-balance sheet partnerships. Its
executives were found guilty of insider trading and lying to investors. Investors could
have been misled by the audit firm's projections of net income, as the actual losses and
liabilities were significantly larger than reported. A major issue was the lack of
independence of the audit firm, Arthur Andersen, which received substantial fees for
non-audit services and had personal relations with the company. This case
demonstrates that merely having accounting and auditing standards in place is
insufficient if auditors lack complete independence. Enron's collapse highlighted
shareholder failure to protect their interests due to asymmetrical information and conflicts
of interest on the board.
●​ WorldCom: Another major telecommunications company in the US, WorldCom
collapsed, and its auditors, Arthur Andersen, failed to detect accounting irregularities.
 ●​ HIH Insurance (Australia): The collapse of HIH Insurance Ltd in Australia, also audited
by Arthur Andersen who provided both audit and non-audit services, led to reflection on
the role and duties of auditors. Its failure was associated with reforms (CLERP 9) aimed
at improving corporate governance in Australia.
●​ BCCI: Established in 1972, the Bank of Credit and Commerce International (BCCI)
secretly supported a failing borrower and falsified its books for 15 years, using customer
deposits to portray financial health. Despite being granted a licence in the UK, which was
regarded as a mistake by creditors, the Bank of England received alarming reports about
the bank. BCCI was investigated for money laundering and links to notorious figures. An
undercover operation uncovered the manipulation of international finance systems for
laundering money for criminals and corrupt politicians, leading to charges and BCCI
pleading guilty to money laundering.
●​ Satyam Scam: Exposed in early 2009, the Satyam Computer Services scandal was
dubbed "India’s own Enron". The chairman confessed to manipulating the company's
accounts by approximately $1.47 billion. While the auditor firm, Price Waterhouse
Coopers (PwC), and the Board of Directors allegedly knew nothing, CBI investigations
found PwC guilty of conspiracy, having been paid highly and relying on documents from
the accused instead of conducting independent investigations. This case highlighted that
PwC intentionally failed to abide by accounting standards and fulfil its duties. The
scandal underscored the need for strict protocols for auditors and brought into focus the
role of independent directors. A decision by the board to take over a related company
owned by the chairman was reversed due to shareholder reaction, impacting the stock
price. The World Bank also barred Satyam for failing to maintain proper documentation
and providing improper benefits to bank staff.
●​ IL&FS Crisis: Infrastructure Leasing & Financial Services Limited (IL&FS), a
systemically important company, faced a severe liquidity crisis with significant debt.
Failure to service debt and the potential for a contagion effect led the Central
Government to apply to the NCLT. Based on massive mismanagement, the existing
board was suspended, and a new board appointed. Subsequent investigations by the
Serious Fraud Investigation Office (SFIO) and the Institute of Chartered Accountants of
India (ICAI) found significant lapses and manipulations by the statutory auditors, who
were held prima facie guilty of professional misconduct. The NCLT ordered the
reopening of the company's books of account for the past five years, and the Ministry of
Corporate Affairs initiated prosecution against the auditors based on the SFIO report.
Factors contributing to this corporate failure included a lack of board effectiveness, risk
blindness, and poor leadership on ethos.

These cases demonstrate common governance problems such as ineffective boards with limited
skills, lack of independent monitoring of executives, inadequate risk management, poor
leadership, and defective communication. They also show how auditor independence and
adherence to standards are crucial and that the legal framework for auditors has evolved in
response to these failures.

Regulatory Framework of Corporate Governance in India

The organizational framework for corporate governance initiatives in India primarily consists of
the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India
(SEBI).

●​ MCA: Facilitates the exchange of experiences and ideas through various appointed
committees and forums such as the National Foundation for Corporate Governance
(NFCG). It oversees the implementation of the Companies Act, 2013.
●​ SEBI: As the market regulator, SEBI monitors and regulates the corporate governance
of listed companies in India. Historically, this was done through Clause 49 of the listing
agreement, which is compulsory for listed companies to comply with. This Clause 49 has
been substantially replicated in the later SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015. SEBI can also initiate action against listed entities
that breach governance norms.
●​ The Companies Act, 2013: This Act is a landmark development in the Indian corporate
landscape, providing a robust framework for corporate governance applicable to all
companies, including Public Sector Undertakings (PSUs). Key provisions include rules
on the composition and function of the Board of Directors, a code for independent
directors, performance evaluation of independent directors, provisions for class action
suits, auditor rotation and independence, and the establishment of the Serious Fraud
Investigation Office (SFIO). The Act also addresses potential conflicts of interest for
auditors by prohibiting them from providing certain services to their audit clients. It lays
down requirements for shareholder disclosures on beneficial interest and provides legal
avenues for addressing mismanagement and financial irregularities, as seen in the
IL&FS case.
●​ National Financial Reporting Authority (NFRA): Established by the Government of
India under Section 132 of the Companies Act, 2013, NFRA is an independent review
body overseeing auditors and auditing firms. Its aim is to improve audit quality while
retaining the self-regulation mechanism by professional bodies. NFRA makes
recommendations to the government on accounting and auditing policies and standards,
monitors/enforces compliance, and oversees the quality of service of associated
professionals. It holds powers of investigation and judicial powers similar to a civil court.
This body was incorporated after major scams like Satyam and Enron highlighted the
need for independent auditor regulation.
●​ Reserve Bank of India (RBI): In the banking sector, the RBI acts as the gatekeeper of
corporate governance. It plays a leading role in formulating and implementing CG
mechanisms based on disclosure and transparency, off-site surveillance, and prompt
corrective action.

This multifaceted framework, involving different regulators and legislative measures, aims to
create an environment of trust, transparency, financial stability, and integrity to support stronger
growth.

Corporate Governance Reforms in India

India has gradually improved its corporate governance standards, stimulated by both domestic
and global corporate failures. The country has liberalised its regulatory framework to align its
corporate governance norms with those in developed nations. The new Companies Act, 2013, is
considered a significant step in this direction, aiming to bring governance standards on par with
global best practices. The evolution of the legal framework for auditors under the Companies
Act, 2013, particularly concerning their appointment, tenure, and restrictions on non-audit
services, directly stems from lessons learned from major scams.

India has seen various initiatives and committee reports shaping its corporate governance
landscape:

CII Initiatives In 1998, the Confederation of Indian Industry (CII) framed the first voluntary code
of corporate governance for listed companies, known as the CII Code of Desirable Corporate
Governance. This report enumerated a set of voluntary recommendations aiming to establish
higher standards of probity and corporate governance. Key recommendations included:

●​ Listed companies above a certain turnover threshold should have professionally

competent non-executive directors.
●​ Disclosure of directorships and committee memberships held by directors in other
companies.
●​ Regular board meetings (at least quarterly, with a maximum 4-month gap) and
availability of minimum information to the board.
●​ Establishment of a qualified and independent audit committee with a specific
composition (minimum 3 non-executive directors, majority independent, at least one with
financial/accounting knowledge, independent chairman present at AGM) to enhance
financial disclosure credibility and transparency.
●​ Appointment of a nomination committee.

These recommendations were voluntary but aimed to improve corporate governance in both
spirit and practice.

SEBI Initiatives and Committees

SEBI has been a crucial driver of corporate governance reforms for listed entities. Observing the
non-uniform quality of financial statements and corporate governance reports, SEBI felt the
need to review and improve the existing code. This led to the formation of several committees:

●​ Kumar Mangalam Birla Committee: While specific details of this committee's

recommendations are not exhaustively detailed, it is mentioned that its
recommendations were influential and included aspects like audit committees reviewing
specific information. Compliance with some of its recommendations, prior to them
becoming mandatory, was noted as being low. The committee divided its
recommendations into mandatory and non-mandatory categories.
 ●​ Naresh Chandra Committee: This committee is mentioned as a National Committee on
Corporate Governance, but no specific details of its recommendations are provided in
the sources.
●​ Narayana Murthy Committee: Constituted by SEBI under the chairmanship of Shri N.
R. Narayana Murthy (Infosys) in 2002, this committee aimed to review and improve the
existing corporate governance code. Key mandatory recommendations included:
○​ Audit committees of publicly listed companies should mandatorily review specific
information such as financial statements, management discussion and analysis,
compliance and risk management reports, auditor letters, and related party
transactions.
○​ Independent auditors should justify deviations from prescribed accounting
standards if a different treatment is followed, and this should be explained in
financial statement footnotes. Where financial statements contain qualifications,
companies should be encouraged to move towards unqualified statements.
○​ Companies should establish procedures for risk assessment and minimization,
with these procedures periodically reviewed. Management must submit a
quarterly report to the entire board documenting business risks, mitigation
measures, and limitations, which the board must formally approve.
○​ The committee recommended doing away with nominee directors due to potential
conflicts of interest, stating that all directors should have the same responsibilities
and liabilities, and any institution wishing to appoint a director should do so via
shareholder election.
○​ A non-mandatory recommendation suggested training for board members on the
company's business model, risk profile, and their responsibilities.
●​ Kotak Committee: Formed by SEBI in 2017 under the chairmanship of Mr. Uday Kotak,
this committee aimed specifically at improving the standards of corporate governance for
listed companies in India. The recommendations of this committee influenced the
subsequent SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

These committees and their recommendations have played a vital role in shaping the current
corporate governance framework in India, leading to the development of more stringent
regulations.

SEBI (LODR) Regulations, 2015

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, are applicable
to listed entities in India. These regulations consolidate and enhance previous requirements,
substantially replicating the provisions of Clause 49. They lay down detailed requirements
across various aspects of corporate governance, including:

●​ Procedures for informing the board about risk assessment and minimization.
●​ Requirements for the Nomination and Remuneration Committee (NRC), including its
composition (at least three directors, all non-executive, minimum half independent,
independent chairman) and disclosure of its terms of reference, composition, meetings,
 and independent director performance evaluation criteria. The regulations also specify
how director remuneration should be disclosed.
●​ Requirements for the Risk Management Committee (RMC), including that a majority of
its members shall be from the board of directors and its chairperson shall be a senior
executive and board member.
●​ Mandating a vigil mechanism that provides safeguards against victimisation and direct
access to the audit committee chairperson in appropriate cases.
●​ Specific disclosure requirements, including the disclosure of non-compliance with any
corporate governance requirement and the reasons thereof. Listed entities must also
disclose the extent to which they have adopted the discretionary requirements specified
in the regulations.

These regulations provide a comprehensive framework for corporate governance practices that
listed companies must adhere to, aiming to ensure transparency, accountability, and protection
of stakeholder interests.

CSR and Corporate Governance

Corporate Social Responsibility (CSR) is presented as an important segment of business

activity and a form of social obligation that a company has towards society at large. Corporate
governance, by definition, involves balancing individual and societal goals, as well as economic
and social goals. It means carrying out business as per the stakeholders' desires.

The need for social responsibility is listed as one of the important reasons for corporate
governance. The Board of Directors (BOD) is expected to protect the rights and manage the
expectations of various stakeholders, including customers, employees, shareholders, suppliers,
the local community, and the government. CSR, in this context, refers to ensuring the success of
the business by including social and environmental considerations into operations. It means
satisfying shareholder and customer demands while managing the expectations of other
stakeholders and contributing positively to society and managing environmental impact.

While some companies genuinely place CSR at the centre of their strategy, others may exploit it
for public relations without putting words into action. The sources indicate a growing focus on
CSR in India, with the government attempting to make it mandatory for companies to spend at
least 2% of their net profits on CSR activities. Companies failing to comply with CSR spending
requirements have received notices from the Ministry of Corporate Affairs. The board is
encouraged to show increased effort and seriousness towards CSR, managing these projects
with the same vigour as other business initiatives.

CSR is integrated into discussions about corporate sustainability, which involves business
practices in environmental, social, and economic areas, aiming for long-term value without
compromising people, the planet, or the economy. The social pillar of corporate sustainability
specifically focuses on a company gaining approval from its stakeholders, employees, and the
community, which aligns directly with CSR principles. The concept of "global society" suggests
that companies are stakeholders alongside governments and civil society and must engage with
their stakeholders, further linking corporate governance with broader social responsibilities.

Comprehending Key Aspects:

●​ To comprehend the regulatory framework of corporate governance in India: The

framework is a combination of legislative provisions (Companies Act, 2013), regulations
by market regulators (SEBI for listed companies, RBI for banks), and oversight bodies
(MCA, NFRA). This multi-layered structure aims to provide a comprehensive system for
directing and controlling companies and ensuring accountability.
●​ To understand how India has gradually improved the standards of corporate
governance: India's journey in improving CG standards is closely tied to learning from
both domestic and international corporate failures. Initiatives from industry bodies (CII)
and regulators (SEBI) have led to voluntary codes and mandatory regulations. The
enactment of the Companies Act, 2013, and subsequent regulations like SEBI (LODR)
2015, along with the establishment of NFRA, represent significant steps in aligning
Indian standards with global requirements and strengthening the framework based on
past lessons. The focus has shifted towards greater transparency, accountability,
independence, and protection of stakeholder interests.
●​ To critically examine the SEBI Regulations on corporate governance: SEBI
regulations, particularly the LODR Regulations, provide a detailed and mandatory
framework for listed companies. They replicate and build upon previous codes like
Clause 49. While aiming for higher standards, challenges remain in achieving
compliance not just on paper but "in spirit". Compliance audits have highlighted
instances of non-compliance, even among major entities like PSUs. The effectiveness of
regulations depends heavily on rigorous enforcement by bodies like SEBI and MCA, as
well as the conscious commitment of senior leadership within companies. The role of
independent directors and various board committees, as mandated by SEBI, is crucial
but their effectiveness depends on factors like selection processes and genuine
independence.
●​ To assess the compliance of LODR Regulations by the companies in India: The
sources indicate that achieving full compliance with corporate governance regulations,
including those stemming from Clause 49 and now LODR, is an ongoing challenge.
While the framework exists, issues like non-compliance by some top PSUs have been
noted. The general tendency for companies to comply "on paper" rather than fully ingrain
governance in their culture highlights the need for continued effort. Factors such as
board composition, independence, and commitment to transparency significantly impact
compliance quality. The regulations themselves require disclosure of non-compliance,
indicating that it is anticipated. Full assessment of compliance across all companies
would require specific compliance reports or studies, but the sources suggest that it
remains a priority for stakeholders and regulators.

In summary, Unit 4 covers the evolution of corporate governance in India, the impact of global
failures, the roles of key regulatory bodies like SEBI and MCA, the framework provided by the
Companies Act, 2013, and the significance of various committee recommendations and SEBI
regulations in shaping current practices. It also touches upon the integration of CSR within the
broader corporate governance agenda.