Corporate governance is the system of rules, practices, and processes by which a company is directed

and controlled to ensure accountability, transparency, and fairness in its relationships with all
stakeholders.

Benefits of Good Corporate Governance

1. Enhances investor confidence – Investors are more likely to invest in companies that are
well-managed and transparent.

2. Ensures transparency and accountability – Clear reporting and defined responsibilities help
prevent misuse of power.

3. Improves company reputation – Ethical practices build trust among stakeholders and the
public.

4. Reduces risk of fraud and mismanagement – Strong controls and oversight minimize
unethical behavior.

5. Promotes long-term sustainability and growth – Focuses on responsible decision-making for

future success.

6. Ensures compliance with laws and regulations – Helps avoid legal penalties by following
applicable rules.

Pillars of Corporate Governance:

1. Transparency – Clear, accurate, and timely disclosure of all material matters.

2. Accountability – Clear roles and responsibilities, with mechanisms to hold individuals

answerable.

3. Fairness – Equal treatment and protection of all stakeholders' rights and interests.

4. Responsibility – Ethical decision-making and responsible management of resources.

5. Independence – Objective judgment by the board, free from undue influence or conflict of
interest

difference between Management and Corporate Governance:

Basis Corporate Governance Management

System of rules and processes to direct Day-to-day operations and

Definition
and control a company. implementation of company policies.

Oversight, accountability, transparency, Planning, organizing, leading, and

Focus
and stakeholder interests. controlling resources.

Responsibility Board of Directors and shareholders. Executives and managers.

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Basis Corporate Governance Management

Protect stakeholder interests and ensure

Objective Achieve organizational goals efficiently.
long-term sustainability.

Broader – includes policies, ethics, Narrower – limited to running business

Scope
compliance, and oversight. operations.

Agency Theory

Agency theory explains the relationship between principals (owners/shareholders) and agents
(managers), where agents are hired to operate the business on behalf of principals. The theory
assumes that agents may not always act in the best interest of principals, leading to a conflict of
interest.

Significance of Agency Theory:

1. Explains corporate governance mechanisms – Helps design structures (like boards and
audits) to reduce conflicts.

2. Improves accountability – Encourages performance-based incentives to align agent actions

with principal goals.

3. Promotes transparency – Advocates for disclosures and monitoring to safeguard shareholder

interests.

4. Guides contract design – Helps create effective contracts to control managerial behavior.

Criticism of Agency Theory:

1. Assumes self-interest – It views managers as always self-serving, ignoring ethical or

professional behavior.

2. Overemphasis on financial incentives – Focuses too much on monetary rewards to align

interests.

3. Neglects stakeholder perspective – Prioritizes shareholders over other stakeholders like

employees or society.

4. Lacks human dimension – Ignores trust, loyalty, and long-term relationships in management.

Stewardship Theory (Definition):

Stewardship theory suggests that managers (stewards) are inherently trustworthy, loyal, and
motivated to act in the best interests of the owners or shareholders, not just for personal gain. It

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contrasts with agency theory by assuming that managers naturally align their goals with those of the
organization.

Key Assumptions:

 Managers are self-actualizing rather than self-serving.

 They value organizational success over personal benefits.

 Trust and empowerment lead to better performance than strict monitoring.

Significance of Stewardship Theory:

1. Promotes trust-based governance – Encourages collaboration and mutual respect between

owners and managers.

2. Enhances organizational performance – Aligning values and goals creates a positive and
productive environment.
3. Reduces need for monitoring – Trust in managers reduces costs related to control and
surveillance.

4. Supports long-term thinking – Focuses on sustainability and collective success, not short-
term gains.

Criticism of Stewardship Theory:

1. Too idealistic – Assumes all managers act ethically and loyally, which may not reflect reality.

2. Lack of control mechanisms – May lead to complacency or misuse of power if trust is

misplaced.

3. Limited applicability – Not suitable in all corporate cultures, especially in large or complex
firms.

4. Overlooks individual interests – Ignores personal ambitions or conflicts that might arise.

Stakeholder Theory (Definition):

Stakeholder theory states that a company should consider the interests of all its stakeholders — not
just shareholders — in its decision-making. Stakeholders include anyone affected by the company’s
actions, such as employees, customers, suppliers, government, environment, and the community.

Key Assumptions:

 A business has a moral obligation to serve all stakeholders.

 Long-term success depends on maintaining good relationships with all affected parties.

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  Value creation should be inclusive and sustainable.

Significance of Stakeholder Theory:

1. Promotes ethical business – Encourages companies to act responsibly toward society and
the environment.

2. Improves reputation and trust – Responsible stakeholder management enhances public

image.

3. Supports sustainable growth – Considers the long-term impact of business decisions.

4. Enhances risk management – Identifying stakeholder concerns early helps avoid conflicts.

Criticism of Stakeholder Theory:

1. Lacks clear priorities – Difficult to balance conflicting interests among different stakeholders.

2. Reduces accountability – No single focus may dilute responsibility and performance

measurement.

3. Complex decision-making – Involving many stakeholders can slow down or complicate

processes.

4. May conflict with profit goals – Prioritizing non-shareholder interests may affect short-term
profitability.

Resource Dependency Theory (Definition):

Resource Dependency Theory explains how organizations depend on external resources (such as raw
materials, capital, information, or labor) and how this dependency shapes their behavior and
structure. To manage these dependencies, organizations form relationships and alliances with
external entities to secure vital resources.

Key Assumptions:

 Organizations are not self-sufficient and rely on their environment for key resources.

 Dependence on external resources creates uncertainty and vulnerability.

 Organizations use strategies like partnerships, mergers, and board interlocks to reduce
uncertainty and control resource flows.

Significance of Resource Dependency Theory:

1. Explains inter-organizational relationships – Shows why companies collaborate or form

alliances.

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 2. Highlights the role of the board of directors – Board members can provide access to critical
resources and networks.

3. Helps manage external dependencies – Guides strategies to reduce uncertainty and gain
control.

4. Influences organizational structure and strategy – Decisions are shaped by the need to
secure resources.

Criticism of Resource Dependency Theory:

1. Overemphasis on external factors – May underplay internal capabilities and innovation.

2. Assumes rational strategic behavior – Not all organizations respond strategically to resource
dependencies.

3. Limited focus on power dynamics – Doesn’t fully address power imbalances between
organizations.

4. Can be too broad – Difficult to apply precisely due to wide environmental factors

Managerial Hegemony Theory (Definition):

Managerial hegemony theory suggests that managers hold dominant control over a company’s
decision-making, with minimal influence from shareholders. It argues that because shareholders are
often passive and dispersed, managers effectively run the company as they see fit, focusing on their
own interests and goals.

Key Assumptions:

 Managers have greater knowledge and control over daily operations than shareholders.

 Shareholders typically lack the resources or will to influence management decisions.

 Managers prioritize their own power, job security, and benefits over shareholder interests.

 Corporate governance mechanisms have limited impact on managerial dominance.

Significance of Managerial Hegemony Theory:

1. Highlights power imbalance – Shows how management can dominate corporate control.

2. Explains limits of shareholder control – Helps understand why shareholder activism may be
weak.

3. Emphasizes need for stronger governance – Suggests reforms to enhance board

independence and accountability.

4. Encourages awareness of managerial motives – Calls for scrutiny of management decisions

and incentives.

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Criticism of Managerial Hegemony Theory:

1. Overlooks shareholder activism – Many shareholders are active and influential in modern
markets.

2. Assumes all managers act selfishly – Ignores ethical managers motivated by company
success.

3. May underestimate legal and regulatory controls – Governance laws limit unchecked
managerial power.

4. Too pessimistic about governance effectiveness – Overlooks improvements in transparency

and accountability.

Anglo-Saxon Model of Corporate Governance (Definition):

The Anglo-Saxon model is a corporate governance system primarily found in countries like the United
States, United Kingdom, Canada, and Australia. It emphasizes shareholder value maximization with
a focus on market-driven mechanisms and minimal state intervention.

Key Features:

 Shareholder-centric: Shareholders are the main stakeholders; their interests take priority.

 Dispersed ownership: Ownership is widely spread among many shareholders with no

dominant owner.

 Board structure: Typically a unitary board combining executive and non-executive directors.
 Market mechanisms: Takeovers, stock market performance, and shareholder activism
regulate management.

 Regulation: Relies more on market forces and less on government control.

 Transparency: Strong emphasis on disclosure and financial reporting.

Japanese Model of Corporate Governance (Definition):

The Japanese model is a corporate governance system unique to Japan, characterized by a

stakeholder-oriented approach that emphasizes long-term relationships, cooperation, and
consensus among various parties like shareholders, employees, banks, and suppliers.

Key Features:

 Stakeholder focus: Balances interests of shareholders, employees, banks, and business

partners.

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  Keiretsu structure: Networks of interlinked companies with cross-shareholdings to ensure
mutual support.

 Main bank system: Banks play a central role in monitoring and financing companies.

 Lifetime employment and seniority: Emphasizes employee loyalty and job security.

 Consensus decision-making: Management decisions are made collectively to maintain

harmony.

 Board structure: Boards tend to be less independent, with many insiders involved.

German Model of Corporate Governance (Definition):

The German model, also known as the Continental European model, is characterized by a two-tier
board system and a strong focus on stakeholder involvement, including employees, shareholders,
and creditors.

Key Features:

 Two-tier board system:

o Management Board (Vorstand): Responsible for day-to-day operations.

o Supervisory Board (Aufsichtsrat): Oversees and appoints the management board,

includes employee representatives.

 Co-determination: Employees have significant representation on the supervisory board

(usually up to 50%).

 Stakeholder orientation: Balances interests of shareholders, employees, creditors, and the

community.

 Long-term focus: Emphasizes sustainable growth and stability rather than short-term profits.

 Strong role of banks: Banks often have close relationships with companies through
shareholdings and financing.

 Legal framework: Extensive regulations govern corporate governance and employee

participation.

Significance:

1. Ensures employee involvement in corporate decisions through co-determination.

2. Promotes accountability with a clear separation of management and supervisory functions.

3. Supports long-term stability and responsible corporate behavior.

4. Facilitates balanced stakeholder interests, reducing conflicts.

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 Indian Model of Corporate Governance (Definition):

The Indian model of corporate governance is a hybrid system influenced by both the Anglo-
Saxon (shareholder-centric) and Continental European (stakeholder-oriented) models,
shaped by India’s unique regulatory, economic, and cultural environment.

Key Features:

 Shareholder focus with growing stakeholder concern: Traditionally focused on protecting

shareholder interests but increasingly incorporating stakeholder welfare.

 Board structure: Mostly a unitary board with a mix of executive, non-executive, and
independent directors.

 Regulatory framework: Strong influence of laws such as the Companies Act, SEBI (Listing
Obligations and Disclosure Requirements) Regulations, and Clause 49.

 Emphasis on transparency and disclosure: Mandatory financial reporting, corporate social

responsibility (CSR), and audit committees.

 Role of promoters: Promoters often hold significant control and influence over companies.

 Increasing importance of independent directors to ensure accountability.

 CSR requirements: Companies above a certain size must spend on social initiatives.

Idea of Governance by Kautilya (Chanakya):

Kautilya, also known as Chanakya, was an ancient Indian scholar and the author of the
Arthashastra, a classic treatise on statecraft, economics, and governance written around 4th
century BCE. His ideas on governance focus on ethical leadership, strong administration,
and welfare of the people.

Key Principles of Kautilya’s Governance:

1. Role of the King (Raja): The king must be a wise, just, and powerful ruler who works for the
welfare of his subjects.

2. Duties and Accountability: The ruler and ministers are accountable for the prosperity and
security of the state. Corruption and negligence are punishable.

3. Efficient Administration: A well-organized bureaucracy with clearly defined roles ensures

smooth functioning.

4. Welfare of People: Governance must prioritize the economic well-being, justice, and safety
of citizens.

5. Control and Surveillance: Use of spies and intelligence to maintain law and order.

6. Ethical Leadership: Emphasis on dharma (duty and righteousness) guiding decision-making.

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 7. Checks and Balances: Ministers and officers are monitored to prevent misuse of power.

Relevance in Today’s Corporate Governance (CG):

 Ethical Leadership: Like Kautilya’s ideal ruler, today’s corporate leaders (CEOs, boards) are
expected to act ethically and responsibly.

 Accountability: Modern CG stresses accountability of management to shareholders and

stakeholders, echoing Kautilya’s focus on responsibility.

 Efficient Systems: Strong internal controls and clear roles in organizations reflect his idea of
an efficient bureaucracy.
 Stakeholder Welfare: The emphasis on welfare aligns with modern CSR and stakeholder
theory in CG.

 Monitoring and Transparency: Use of audits, compliance, and transparency parallels

Kautilya’s control mechanisms.

 Checks and Balances: Separation of powers among board, management, and auditors
follows the idea of preventing abuse of authority

UNIT 2
Board Structure and Types of Directors

Board Structure:

The board of directors is the governing body of a company responsible for overseeing management
and protecting shareholders’ interests. Its structure varies by company size, ownership, and
regulatory framework but generally includes:

1. Unitary Board (Single-tier):

o Common in many countries including India and the US.

o Combines executive and non-executive directors on one board.

o Board members collectively make decisions.

2. Two-tier Board:

o Used in countries like Germany.

o Consists of:

 Management Board: Handles day-to-day operations.

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  Supervisory Board: Oversees and appoints management board members;
includes employee representatives.

Types of Directors:

1. Executive Director:

o Involved in day-to-day management of the company.

o Usually holds a full-time position (e.g., CEO, CFO).

2. Non-Executive Director (NED):

o Not involved in daily operations.

o Provides independent judgment and oversight.

3. Independent Director:

o A type of non-executive director with no material relationship with the company.

o Ensures unbiased decisions, protects minority shareholders.

o Plays a crucial role in audit, nomination, and remuneration committees.

4. Nominee Director:

o Appointed by external parties like lenders, investors, or government to represent

their interests.

5. Woman Director:

o A director who is a woman; mandated on boards of listed companies in India to

improve gender diversity.

6. Additional Director:

o Appointed by the board between two annual general meetings; holds office until the
next AGM.

7. Alternate Director:

o Temporarily appointed to act in place of a director during absence.

Role of the Board:

 Setting company strategy and policies.

 Appointing and supervising senior management.

 Ensuring legal and regulatory compliance.

 Protecting shareholders' and stakeholders' interests.

 Monitoring financial performance and risk management.

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Relevant Provisions Regarding Composition of Board as per SEBI (LODR) Regulations, 2015

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) lay down
detailed requirements for the composition of the board of directors of listed companies in India to
ensure effective corporate governance.

Key Provisions on Board Composition:

1. Board Size:

o The board should have an appropriate size with adequate diversity, but a minimum
of 3 directors is mandatory.

2. Independent Directors (ID):

o At least one-third of the board should comprise independent directors if the

chairperson is executive.

o If the chairperson is non-executive, at least half of the board should be independent

directors.

o IDs must be individuals with no material or pecuniary relationship with the

company or promoters that could affect independence.

3. Woman Director:

o Every listed company must have at least one woman director on its board.

4. Non-Executive Directors (NEDs):

o There should be a balance of executive and non-executive directors to ensure

independent oversight.

5. Nominee Directors:

o Nominee directors representing lenders or investors are allowed but must be

disclosed.

1. Audit Committee:

This committee oversees the company’s financial reporting process, monitors the
effectiveness of internal controls, reviews audit findings, and ensures compliance with
accounting standards. It also liaises with internal and external auditors to safeguard
transparency and accuracy in financial disclosures.

2. Shareholder Grievance Committee:

Responsible for addressing and resolving complaints from shareholders related to issues like
dividend payments, transfer of shares, and other shareholder rights. It ensures timely

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 redressal, enhancing investor confidence and maintaining healthy company-shareholder
relations.

3. Nomination Committee:

Tasked with identifying and recommending qualified candidates for the board of directors
and senior management roles. The committee assesses skills, experience, and diversity
requirements to ensure a competent and balanced board.

4. Remuneration Committee:
Determines the salary structure, bonuses, stock options, and other incentives for directors
and top executives. The committee aligns remuneration with company performance, market
standards, and shareholder interests to motivate and retain talent.

NON MANDATORY COMMITTEE

1. Compliance Committee:

This committee is responsible for overseeing the company’s adherence to all applicable laws,
regulations, and internal policies. It monitors compliance risks, establishes standards and
procedures, and ensures that the company maintains ethical business practices to avoid legal
penalties and reputational damage.

2. Risk Management Committee:

The committee identifies, evaluates, and manages various risks faced by the company,
including financial, operational, market, and strategic risks. It develops risk mitigation
strategies, monitors risk exposure regularly, and ensures that appropriate controls are in
place to safeguard the company’s assets and sustainability.

3. Investment Committee:

This committee reviews and approves investment decisions, including capital expenditures,
acquisitions, and portfolio management. It assesses the risks and returns of proposed
investments to ensure alignment with the company’s strategic objectives and financial goals,
thereby optimizing resource allocation.

Insider Trading

Meaning:

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 Insider trading refers to the buying or selling of a company’s securities (like shares) by
someone who has access to non-public, price-sensitive information about the company.
Such trading gives an unfair advantage and is considered illegal as it harms market integrity.

Regulation of Insider Trading in India:

1. Regulatory Authority:

o The Securities and Exchange Board of India (SEBI) regulates insider trading under
the SEBI (Prohibition of Insider Trading) Regulations, 2015.

2. Key Provisions:
o Insiders: Includes company directors, officers, employees, or any person with access
to unpublished price-sensitive information (UPSI).

o Unpublished Price-Sensitive Information (UPSI): Any information that can materially

affect the company’s share price, not yet made public.

o Prohibition: Insiders are prohibited from trading based on UPSI or communicating it

to others

Whistleblowing

Meaning:

Whistleblowing is the act of reporting unethical, illegal, or improper conduct within an

organization by an employee or insider, aimed at exposing wrongdoing to protect the public
interest or organizational integrity.

Types of Whistleblowing:

1. Internal Whistleblowing:

o Reporting misconduct within the organization to higher management or a

designated internal authority.

2. External Whistleblowing:

o Reporting the issue to an outside body such as regulators, media, or law

enforcement agencies when internal reporting is ineffective or unsafe.

3. Anonymous Whistleblowing:

o Reporting without revealing the identity of the whistleblower to protect against

retaliation.

Regulation of Whistleblowing in India:

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 1. Companies Act, 2013:

o Section 177(9) mandates listed companies and certain others to establish a vigil
mechanism or whistleblower policy to enable directors and employees to report
genuine concerns.

2. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:

o Requires listed companies to implement a whistleblower policy ensuring

confidentiality and protection against retaliation.

3. The Whistle Blowers Protection Act, 2014 (Draft/Proposed):

o Aimed to protect whistleblowers from victimization but is yet to be fully

implemented nationwide.

4. Other laws:

o Various sectoral laws encourage or require whistleblower mechanisms (e.g.,

Prevention of Corruption Act).

Shareholder Activism

Meaning:
Shareholder activism is the effort by shareholders, especially institutional investors or activist
investors, to influence a company’s behavior, policies, or management decisions to increase
shareholder value or promote social, environmental, or governance changes.

Features of Shareholder Activism:

 Engagement: Active involvement of shareholders beyond voting in annual meetings.

 Goal-oriented: Seeks changes in corporate governance, strategy, or financial policies.

 Methods: Includes proxy battles, public campaigns, shareholder proposals, litigation, or

dialogue with management.

 Influence: Can affect board composition, executive pay, mergers, or CSR policies.

 Focus: Can be financial (profit-driven) or social (environmental, ethical issues).

Pros of Shareholder Activism:

 Improves corporate governance and accountability.

 Can lead to better financial performance and increased shareholder value.

 Encourages transparency and ethical business practices.

 Empowers minority shareholders.

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Cons of Shareholder Activism:

 May lead to short-termism, focusing on quick profits over long-term value.

 Can cause conflicts between management and activists, disrupting operations.

 Sometimes expensive and time-consuming.

 Risk of activists pursuing personal agendas rather than company’s best interests.

Major Cases of Shareholder Activism in India:

 Reliance Industries (2018): Investors pushed for better corporate governance and separation
of chairman and CEO roles.

 ICICI Bank (2018-2019): Shareholders actively questioned management on governance and

lending practices leading to changes in leadership.

 Tata Sons (2016-2018): Public shareholder dissent and boardroom battle led to significant
leadership changes.

Regulation of Shareholder Activism in India:

 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR):

o Mandates disclosure norms and voting rights protection to empower shareholders.

 Companies Act, 2013:

o Provides rights to shareholders for calling meetings, proposing resolutions, and proxy
voting.

 SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:

o Regulates takeover bids and acquisition of shares to ensure fair play.

 SEBI Insider Trading Regulations:

o Prevent misuse of confidential information during activism campaigns.

Role of Institutional Investors

Meaning:

Institutional investors are organizations that invest large sums of money on behalf of others (like
pension funds, mutual funds, insurance companies). They play a crucial role in corporate governance
by influencing management decisions, ensuring accountability, and promoting long-term value
creation.

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Types of Institutional Investors in India:

1. Mutual Funds: Pool money from individual investors to invest in diversified portfolios.

2. Insurance Companies: Invest premiums collected from policyholders in various financial

instruments.

3. Pension Funds: Manage retirement savings and invest to generate steady returns for
beneficiaries.

4. Foreign Portfolio Investors (FPI): Overseas investors investing in Indian securities.

5. Banks and Financial Institutions: Invest in stocks, bonds, and other assets as part of their
portfolio.

Role of Institutional Investors:

 Provide capital and liquidity to markets.

 Exercise voting rights and influence board decisions.

 Monitor company management to prevent mismanagement.

 Encourage transparency and good governance practices.

 Promote sustainable and ethical business through active engagement.

SEBI Stewardship Code (2020):

 A set of voluntary guidelines issued by SEBI to institutional investors.

 Encourages investors to actively monitor investee companies.

 Promotes responsible investing and engagement with companies on governance, strategy,

performance, and risk management.

 Requires disclosure of stewardship policies and voting behavior for greater transparency.

 Aims to strengthen accountability of institutional investors in protecting shareholders'

interests.

Class Action Suits

Meaning:

A Class Action Suit is a legal action filed by a group of people collectively (a “class”) who have similar
claims against a defendant, allowing them to sue as a single party instead of filing individual lawsuits.

Features:

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  Collective Litigation: Multiple claimants with common issues join together.

 Representative Plaintiff: One or more individuals represent the entire class.

 Judicial Efficiency: Streamlines similar claims into one lawsuit.

 Common Issues: Claims must share common questions of law or fact.

 Binding Decision: The court’s decision applies to all class members.

Challenges:

 Difficulty in defining the class clearly.

 Managing large numbers of plaintiffs and ensuring their interests are represented fairly.

 Complexity in notifying all class members.

 Potential for conflicts of interest among class members.

 High legal and administrative costs.

Pros:

 Cost-effective for plaintiffs by sharing expenses.

 Provides access to justice for individuals with small claims.

 Encourages corporate accountability and deterrence of wrongdoing.

 Reduces multiple lawsuits and inconsistent judgments.

Cons:

 May lead to less personalized justice for some class members.

 Risk of abuse by opportunistic plaintiffs or lawyers.

 Possible delays due to complex procedures.

 Potential for lower compensation per claimant compared to individual suits.

Regulation in India:

 Companies Act, 2013 (Section 245): Allows members or depositors to file class action suits
against companies for fraud, mismanagement, or oppression.

 Securities and Exchange Board of India (SEBI) Regulations: Investors can file class action
suits for securities fraud or misrepresentation.

 Consumer Protection Act, 2019: Facilitates class actions by consumers against goods or
service providers.

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  Supreme Court Guidelines: Courts have evolved principles for managing class actions to
ensure fairness and efficiency.

CSR and Governance

Meaning of CSR (Corporate Social Responsibility):

CSR refers to a company’s commitment to operate ethically and contribute to economic

development while improving the quality of life of employees, local communities, and society at
large through sustainable and socially responsible practices.

Relationship Between Corporate Governance and CSR:

 Corporate Governance provides the framework of rules, practices, and processes by which a
company is directed and controlled.

 CSR is an integral part of good corporate governance as it ensures the company acts
responsibly towards its stakeholders beyond just shareholders.

 Both aim to promote transparency, accountability, and ethical behavior.

 Good governance supports effective implementation of CSR policies and helps align business
strategies with social and environmental responsibilities.

CSR Regulations in India:

 Companies Act, 2013 (Section 135):

o Mandates companies meeting certain financial criteria to spend at least 2% of their

average net profits on CSR activities.

o Requires companies to form a CSR Committee to formulate and monitor CSR policies.

o Specifies activities qualifying as CSR (e.g., education, health, environment, poverty

alleviation).

o Companies must disclose CSR activities and spending in the Board’s Report.

 Schedule VII of Companies Act: Lists the broad areas where CSR can be applied.

 SEBI Guidelines: Listed companies must comply with CSR rules and disclose their CSR
initiatives in annual reports.

Trusteeship Model of Gandhiji in Context of CSR

Concept of Trusteeship:

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Mahatma Gandhi’s Trusteeship is a socio-economic philosophy where wealth and resources are
viewed as held “in trust” by the wealthy for the welfare of society. Instead of owning property
absolutely, the rich act as trustees who use their wealth responsibly for the common good, ensuring
equitable distribution and social justice.

Trusteeship Model in Context of CSR:

 Under this model, businesses are seen as custodians of wealth, not just profit-makers.

 Corporates should manage their resources responsibly, balancing profit-making with social
welfare.

 Emphasizes ethical responsibility towards employees, community, environment, and society

at large.

 Promotes the idea that businesses must contribute to social development voluntarily and
sustainably.

 Aligns closely with the modern concept of CSR, where companies undertake initiatives
beyond legal obligations for social good.

Relevance Today:

 Encourages businesses to adopt a long-term, ethical approach to wealth management.

 Supports sustainable development goals by promoting inclusive growth and reducing

inequality.

 Inspires companies to integrate social and environmental concerns into their business
strategies.

 Acts as a moral foundation for CSR practices rooted in fairness, equity, and trusteeship of
resources.

UNIT 3
BCCI (United Kingdom, 1991)
Modus Operandi:
 Rapid global expansion with acquisitions across Africa and Asia, and a
presence in 70 countries.

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  Massive lending without proper documentation or securities, resulting in
large bad debts.
 Use of complex and opaque corporate structures, including shell
companies, to hide losses and mislead regulators.
 Engaged in illegal activities such as money laundering (notably through
its Panama branch) and proprietary trading to cover losses.
 Manipulated financial accounts to show inflated profits while hiding true
losses and liabilities.
Corporate Governance Issues:
 Board of Directors: Virtually non-existent; the bank was controlled by
the founder Agha Hassan Abedi and CEO Naqvi, with little to no
oversight.
 Risk Management: Poor or absent; reckless loan lending with no proper
risk assessment or documentation.
 Regulatory Supervision: Weak due to complex structure and offshore
locations in regulatory-light jurisdictions (Luxembourg, Cayman Islands).
Lack of transparency and deliberate concealment of information from
regulators.
 Audit System: Fragmented and ineffective; different parts audited by
different firms, with key areas left unaudited. Price Waterhouse revealed
unrecorded losses but still signed off reports, contributing to failure in
early detection.
Aftermath:
 Regulators seized branches in multiple countries including the UK, US,
France, Spain, and Switzerland.
 The bank was liquidated, and depositors began a long struggle to recover
funds.
 BCCI is considered one of the largest banking frauds, with losses
estimated at around $2 billion and over 100,000 affected depositors
globally.

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  The scandal prompted calls for stronger global banking regulations,
improved transparency, and better risk management in financial
institutions.

Maxwell Communications Corporation (UK, 1991)

Modus Operandi:
 Robert Maxwell aggressively expanded the business by acquiring around
400 companies, including Macmillan Publishers and various media
outlets, forming the "Maxwell Empire."
 He borrowed heavily (around $3 billion) to finance these acquisitions,
often pledging company assets as collateral.
 Funds raised for employee pension schemes were misappropriated and
mixed with general corporate funds, hiding true liabilities.
 Maxwell personally controlled all financial operations, including
movement of funds, without adequate checks.
Corporate Governance Issues:
 Single Control: Maxwell held the roles of chairman and CEO, centralizing
power and decision-making in himself without effective oversight.
 Ineffective Board: The board was passive and failed to challenge
Maxwell’s control or excessive borrowing, enabling unchecked
malpractices.
 Lack of Transparency: Pension funds and company assets were
commingled, with accounts not properly prepared or disclosed; trusts
were set up in jurisdictions with lax accounting regulations.
 Audit Failures: Auditors failed to detect or report irregularities, later
admitting to errors in judgment, which allowed financial manipulations
to continue unchecked.
Aftermath:
 Following Maxwell’s mysterious death in 1991, the empire rapidly
collapsed under heavy debt.

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  Investigations exposed the misappropriation of pension funds and poor
financial practices.
 The group’s assets were sold off, Mirror Group and Maxwell
Communications filed for bankruptcy, marking one of the largest
insolvencies in UK corporate history.
 The scandal led to calls for stronger corporate governance, better board
oversight, and more rigorous auditing standards.
Vivendi SA, France (2002)
Modus Operandi:
 Originally a water utility company, Vivendi diversified into energy,
construction, and later aggressively expanded into telecommunications
and mass media by acquiring numerous companies (Net Hold, CEDENT
software, Universal Studios, Canal+).
 CEO Jean-Marie Messier had an ambitious vision to make Vivendi the
world’s largest media conglomerate.
 To finance rapid acquisitions, Vivendi borrowed heavily and issued
shares, accumulating massive debt.
 Despite worsening financial health, the company presented misleading
financial information to investors and the public, portraying an overly
optimistic picture.
 Insider trading by executives was also detected.
Corporate Governance Issues:
 Lack of Proper Leadership: The CEO pursued aggressive expansion with
little regard for financial sustainability, buying unrelated businesses, and
piling up unsustainable debt.
 Ineffective Board: The board was dominated by Messier, failed to
challenge acquisitions or debt risks, and did not exercise proper
oversight.
 Excessive CEO Compensation: Messier received a $20 million
compensation package despite poor company performance, adding to
governance concerns.

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  Misleading Accounting Practices: Profits were artificially inflated; losses
were masked; financial statements were manipulated to hide the true
debt levels.
 Failure of Credit Rating Agencies: Major credit agencies like Moody’s
and S&P failed to downgrade Vivendi’s credit rating timely, misleading
investors.
 Insider Trading: Executives sold shares before negative financial news
became public.
Aftermath:
 Vivendi suffered the largest corporate loss in French history.
 CEO Jean-Marie Messier was forced to resign and found guilty of
embezzlement.
 The company sold non-core assets and stakes in several companies to
reduce debt.
 Minority shareholders filed legal cases against the company for
concealing financial information.
 The collapse highlighted serious gaps in corporate governance and
regulatory oversight in France’s corporate sector.
WorldCom, USA
Background:
 Originally founded as Long Distance Discount Services (LDDS) in 1983,
renamed WorldCom in 1995.
 Became a major telecom player by offering low-cost plans and acquiring
many smaller companies to build market dominance.
 CEO Bernard Ebbers led the aggressive expansion aiming to capture a
monopoly-like position.
What Went Wrong:
 WorldCom hid its real financial performance by manipulating accounts to
show consistent profit growth despite suffering losses.

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  The company capitalized on heavy borrowing to finance numerous
acquisitions, piling up massive debt.
 Expenses were disguised as investments to artificially inflate profits.
 Following the Enron scandal in 2001, investor scrutiny increased,
eventually exposing WorldCom’s accounting fraud in 2002.
Reasons for Failure:
 Aggressive acquisitions fueled by borrowed funds created unsustainable
debt.
 Deliberate misrepresentation of financial data to deceive investors and
stakeholders.
 Efforts to maintain a facade of profitability despite operational losses.
Governance Failures:
1. Lack of Proper Leadership:
o CEO focused on expansion and personal ambitions rather than
honest financial health.
2. Ineffective Board:
o Board was dominated by CEO’s influence, failed to question or
stop falsified financial reporting.
3. Audit Failure:
o Arthur Andersen, the auditor, failed to detect or report financial
irregularities.
4. Misleading Analyst Ratings:
o Analysts, including Jack Grubman, gave falsely positive ratings
despite the company’s poor financial position. Grubman was later
fired and banned for this misconduct.
Enron Corporation, USA
Background:
 Founded in 1985 by Kenneth Lay in Houston, Texas.

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  Was a leading energy and commodities trading company, publicly traded
on the New York Stock Exchange.
Nature of the Fraud:
 Accounting Fraud:
o Used complex accounting tricks to hide losses and inflate profits.
 Mark-to-Market Accounting:
o Enron recorded projected future profits as current income,
artificially inflating earnings.
 Special Purpose Entities (SPEs):
o Created subsidiaries to offload bad assets and liabilities, keeping
them off the main balance sheet and hiding losses.
Governance Failures:
1. Board of Directors:
o Failed to exercise proper oversight and allowed deceptive
accounting practices to continue unchecked.
2. Audit Firm Complicity:
o Arthur Andersen, one of the top accounting firms, audited Enron
but covered up fraud and even destroyed evidence.
3. Regulatory Oversight:
o The SEC was slow and ineffective in detecting and acting against
Enron’s fraudulent activities.
The Collapse:
 Fraud was exposed in late 2001.
 Enron declared bankruptcy in December 2001, marking one of the
largest corporate failures in U.S. history.
 The bankruptcy resulted in massive losses for investors and employees,
many losing pensions and savings.
Impact and Aftermath:

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  Investor Losses: Billions lost in stock value; employees faced job loss and
financial ruin.
 Legislative Reforms: Led to the Sarbanes-Oxley Act (2002), imposing
stricter rules on corporate governance, accounting standards, and
auditor independence.
 Demise of Arthur Andersen: The auditing firm was dissolved due to its
involvement in Enron’s fraud, severely damaging the auditing professio
Lehman Brothers (USA)
Background:
 Founded in 1850, headquartered in New York City.
 A major global financial services firm involved in investment banking,
trading, and financial services.
Nature of the Collapse:
 Subprime Mortgage Exposure:
o Heavy involvement in the subprime mortgage market, bundling
high-risk mortgage loans and selling them to investors.
 Risk Management Failures:
o Excessive leverage (debt) used to pursue returns, exposing the
firm to huge financial risk.
o Mismatch in funding: short-term funding was used to support
long-term investments, creating vulnerability when market
conditions deteriorated.
Key Governance Failures:
1. Management Decisions:
o CEO Richard Fuld and senior management aggressively pursued
risky expansion without adequate risk controls or contingency
planning.
2. Over-Reliance on Complex Financial Products:

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 o High dependence on sophisticated instruments like Collateralized
Debt Obligations (CDOs) and Credit Default Swaps (CDS),
increasing exposure to market volatility.
3. Regulatory Oversight:
o Regulatory agencies (SEC and Federal Reserve) were criticized for
failing to act promptly despite ongoing concerns about “too big to
fail” firms.
Collapse:
 Filed for bankruptcy in September 2008 after failing to raise more debt
and losing investor confidence.
 Marked the largest bankruptcy filing in U.S. history.
Impact and Aftermath:
 Global Financial Crisis:
o Lehman’s failure triggered worldwide financial panic and
recession, leading to a liquidity crunch in global markets.
 Government Intervention:
o The U.S. government and Federal Reserve had to bail out other
financial institutions to stabilize the economy.
 Regulatory Reforms:
o Led to stricter financial regulations via the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
o Focused on increasing transparency, reducing systemic risk, and
improving regulation of large financial institutions.

Sir Adrian Cadbury Committee

Introduction
The Cadbury Committee, officially known as the Committee on the Financial
Aspects of Corporate Governance, was established in 1991 in the United
Kingdom by the Financial Reporting Council, the London Stock Exchange, and
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the accounting profession. Chaired by Sir Adrian Cadbury, it was formed in
response to a series of high-profile corporate collapses in the UK such as Polly
Peck, Maxwell Communications, and BCCI. These scandals raised serious
concerns about corporate accountability and transparency, shaking investor
confidence. The Cadbury Committee aimed to promote good corporate
governance practices and ensure accurate financial reporting. Its landmark
report, known as the Cadbury Report, was published in 1992 and has had a
lasting influence on corporate governance worldwide.

Key Recommendations of the Cadbury Report

1. Board Structure and Responsibilities
o Separation of the roles of Chairman and Chief Executive Officer
(CEO) to prevent concentration of power in one individual.
o Clear distribution of responsibilities at the top management level
to avoid any single person exercising absolute control.
o The board should have at least three non-executive directors, with
preferably two being independent (no financial or personal ties to
the company), to ensure unbiased supervision.
2. Non-Executive Directors
o Non-executive directors must be genuinely independent, with no
conflicts of interest that could compromise their duties.
o They should actively participate in key board committees,
especially the audit and remuneration committees, ensuring
proper checks and balances.
3. Financial Reporting and Controls
o Audit committees should consist of at least three independent
non-executive directors to oversee the integrity of financial
reporting.
o Emphasis on achieving financial transparency and establishing
robust internal controls.

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 o Annual reports must disclose whether the company complies with
the Cadbury Code of Best Practice, or explain any deviations (the
“comply or explain” approach).
4. Accountability and Audit
o Directors must provide a balanced and fair assessment of the
company’s current position and foreseeable developments.
o Auditors play a crucial role in enhancing the credibility of financial
statements and must operate independently.

Impact and Legacy

The Cadbury Report is considered a landmark in modern corporate governance
standards. Its “comply or explain” principle allowed companies flexibility while
encouraging widespread adoption of good governance practices without
excessive rigidity. The report influenced corporate governance legislation not
only in the UK (leading to the Combined Code of Corporate Governance) but
also inspired governance codes globally, including the OECD Principles of
Corporate Governance. The Cadbury Report laid the foundation for improved
board accountability, transparency, and financial reporting, standards that
remain highly relevant today.

Sarbanes-Oxley Act (SOX), 2002

Introduction
The Sarbanes-Oxley Act (SOX) is a landmark federal law enacted in the United
States in 2002 in response to major corporate scandals involving companies like
Enron, WorldCom, and Tyco. These scandals severely damaged investor
confidence and exposed serious weaknesses in corporate governance,
management accountability, and financial reporting. SOX was designed to
protect investors by improving the accuracy, reliability, and transparency of
corporate disclosures while enhancing governance and accountability within
corporations.

Objectives of the Sarbanes-Oxley Act

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  Increase the accuracy and reliability of corporate disclosures.
 Protect investors from fraudulent financial reporting and manipulation.
 Hold corporate executives and board members accountable for financial
misstatements.
 Improve internal control systems over financial reporting processes.

Key Provisions of the Sarbanes-Oxley Act

1. Establishment of the Public Company Accounting Oversight Board
(PCAOB)
o Regulates auditing of publicly traded companies.
o Sets auditing standards, monitors compliance, and investigates
registered accounting firms.
2. Responsibilities of Corporate Executives
o Section 302: CEOs and CFOs must personally certify the accuracy
of financial reports, bearing individual liability for misstatements.
o Section 906: Criminal penalties apply for certifying false or
misleading financial statements.
3. Internal Controls and Audit Requirements
o Section 404: Companies must implement and maintain effective
internal controls over financial reporting, which must be audited
by independent auditors. This section is significant but costly due
to extensive documentation and testing.
4. Enhanced Financial Disclosures
o Requires timely and accurate disclosure of financial data, including
off-balance-sheet transactions and use of Special Purpose Entities
(SPE).
o Prevents issuance of incomplete or misleading financial
statements.
5. Auditor Independence

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 o Restricts auditors from providing non-audit services to audit
clients to avoid conflicts of interest.
o Requires rotation of lead audit partners every five years to ensure
independence.
6. Whistleblower Protection
o Protects employees who report fraud or violations from retaliation
or intimidation.
7. Criminal Penalties for Fraud
o Introduces strict penalties for securities fraud, document
destruction, or obstruction of investigations by corporate officers.

Impact and Legacy

 Accountability: SOX has significantly improved the accountability of
CEOs and corporate officers for financial reporting accuracy.
 Investor Confidence: Enhanced disclosure requirements have helped
restore and improve investor trust in corporate financial statements.
 Cost of Compliance: Compliance, especially Section 404, has been
resource-intensive and costly for many companies.
 Global Influence: SOX’s principles have influenced corporate governance
reforms internationally, improving transparency and accountability
worldwide.
 SOX remains one of the most important legal frameworks protecting
investors and regulating corporate financial practices in the US and
beyond.
Organisation for Economic Cooperation and Development (OECD) Principles
on Corporate Governance
Background:
 First published in 1999 and revised in 2015.
 Serve as key international standards for good corporate governance
practices.

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  Support governments, regulators, and market participants in improving
legal, institutional, and regulatory frameworks for corporations.
 Help companies become more transparent, responsible, and attractive to
investors.

Core Values and Principles (6 Key Areas)

1. Ensuring the Basis for an Effective Corporate Governance Framework
o Corporate governance framework must enhance market
effectiveness.
o It should be legally and regulatorily clear with enforcement and
supervision.
o Avoid excessive burden on companies but ensure public
accountability and transparency.
2. Rights of Shareholders and Their Protection, Key Ownership Functions
o Shareholders have rights like ownership registration, transfer of
shares, access to company info, participation in meetings, voting,
electing/removing board members, and receiving dividends.
o Equal treatment of all shareholders, especially minority and
foreign investors.
o Protection against insider trading and abusive self-dealing.
3. Institutional Investors, Intermediaries, and Stock Exchanges
o Institutional investors should disclose governance and proxy voting
policies transparently.
o Stock markets must uphold high governance standards and
minimize investor risk.
o Transparency and conflict-of-interest management in proxy
advisors, auditors, and credit rating agencies.
4. Role of Stakeholders in Corporate Governance
o Recognizes interests of employees, creditors, suppliers,
communities, etc.

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 o Industrial laws should protect stakeholder rights and provide
means for addressing grievances.
o Encourages stakeholders' active involvement in governance
processes, e.g., through board structures.
5. Disclosure and Transparency
o Companies must provide timely, sufficient, and appropriate
disclosure on financial results, objectives, ownership, risks,
governance policies, and related party transactions.
o Reports should meet high-quality accounting standards, verified
by independent auditors.
o Communication channels must ensure fair and efficient
information dissemination.
6. Responsibilities of the Board of Directors
o Board must act in good faith, on an informed basis, diligently, and
in the company's and shareholders' best interests.
o Define strategic goals, mobilize resources, oversee management,
and report accountability to shareholders.
o Safeguard financial reporting systems and ensure auditor
independence.
o Board composition should ensure independence, objectivity, skill,
experience, and diversity.

Impact and Global Influence

 Widely referenced by policymakers, regulators, companies worldwide.
 Basis for many national governance codes.
 Endorsed by institutions like the World Bank and IMF for governance
assessments.
 Help stabilize financial markets by promoting transparency, minimizing
crises risk, attracting long-term investment, and supporting economic
growth.

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  Principles evolve to include new governance trends like sustainability
and ESG (Environmental, Social, and Governance) concerns.

UNIT 4
KUMAR MANGALAM COMMITTEE
Introduction
 The Kumar Mangalam Birla Committee was established by SEBI in 1999
to improve corporate governance practices in India.
 The committee took guidance from international reports such as the
Cadbury Committee Report and OECD Principles of Corporate
Governance.
 At that time, Indian companies lacked proper governance frameworks.
The committee's work laid the foundation for systematic and
transparent corporate governance.
 Its recommendations led to the introduction of Clause 49 in the listing
agreement, making corporate governance compliance mandatory for
listed companies.
 The purpose was to prevent corporate scams, promote shareholder
protection, and ensure transparent business practices.

Key Recommendations
1. Shareholder Value: Emphasis on enhancing shareholder value as a
fundamental goal of businesses.
2. Independent Directors: Defined their role; they must not have financial
ties with promoters or stakeholders. Any such relationship must be
disclosed.
3. Board Composition: Recommended an optimal mix of executive and
non-executive directors.
4. Audit Committee:

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 o Suggested formation of an Audit Committee with responsible
directors.
o Must meet at least thrice a year.
o Granted powers to seek information, conduct investigations, and
seek expert advice.
5. Coordination: Emphasized coordination between the Board, internal
auditors, and external auditors on financial matters, including:
o Auditor appointments and removals.
o Internal control accuracy.
o Audit discussions.
6. Board Meetings: At least four board meetings annually to discuss key
company matters in a structured environment.
7. Accounting Standards: Supported SEBI’s accounting recommendations;
companies must consolidate accounts of subsidiaries where they hold
51% or more.
8. Related Party Transactions: Called for adequate disclosure and
treatment of such transactions.
9. Management Discussion and Analysis Report (MDAR): Introduced the
concept of MDAR to be included in the Annual Report, covering:
o Industry trends
o Risks and concerns
o Internal controls
o Company outlook
10. Corporate Governance Report: Annual reports must have a distinct
section on corporate governance practices.

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NARAYANA MURTHY COMMITTEE
Introduction
 The Narayana Murthy Committee was formed by SEBI to review
corporate governance practices in India.
 Headed by N.R. Narayana Murthy, the committee was created in
response to rising global corporate frauds and the need for greater
transparency and accountability.
 Its objective was to establish strong governance mechanisms, ensure
ethical functioning, and build investor confidence.
 The committee categorized its recommendations into Mandatory and
Non-Mandatory, as directed by SEBI.

Mandatory Recommendations
1. Audit Committee:
o Should review financial statements and submit an audit report
with quarterly/half-yearly data.
o Must hold discussions with management on financial
performance.
o Should include financially literate members, with at least one
expert in accounting/finance.
2. Risk Management:
o Board must regularly assess and update risk management
procedures.
o Risks may include economic, political, industry-specific, global,
and general risks.
3. Initial Public Offerings (IPOs):
o Companies must disclose detailed financial and operational data.
o A statement of fund utilization (especially if used for other than
stated purposes) must be prepared.
o Auditors must be given full access to information.
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 4. Code of Conduct:
o The board must establish a code of conduct for directors and
senior management.
o This code must be published on the company’s website and
followed by all concerned.
5. Directors:
o Remuneration of executive and non-executive directors should be
approved by the board and shareholders.
o Directors should be appointed by shareholders.
o Non-executive directors must not have material pecuniary
relationships and should not have been:
 Executives in the company in the last 3 years.
 Major shareholders or key customers/suppliers.
6. Whistleblower Mechanism:
o The audit committee should oversee whistleblower (vigil)
mechanisms.
o Employees must be able to report unethical behavior directly to
the audit committee.

Non-Mandatory Recommendations
1. Performance Review of Non-Executive Directors:
o Should be evaluated by a peer group consisting of the entire
board.
2. Training of Board Members:
o Companies should train their board members to help them
understand the business, associated risks, and adopt best
management practices.
3. Disclosure by Security Analysts:

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 o The committee recommended SEBI to develop rules for public
disclosure of reports by security analysts to ensure transparency
and avoid conflict of interest.

RELEVANT PROVISIONS OF THE COMPANIES ACT, 2013

Relevant Provisions of Companies Act, 2013

1. Section 177 – Audit Committee
The recommendation regarding the composition and role of the audit
committee was incorporated. It was mandated that members should
have a sound understanding of financial statements, and at least one
member should be an expert in accounting and financial management.
2. Section 145 – Auditor’s Report
This section mandates that the existing auditor of a company must sign
the auditor’s report, ensuring responsibility and transparency in
reporting.
3. Board Approval for Contracts
All contracts entered into by the company must be approved by the
Board of Directors. Each contract should be supported with proper
justification for entering into the agreement.
4. Reporting of Contracts without Board Approval
If a company enters into a contract without prior approval of the board,
the matter must be reported at a meeting of shareholders within three
months from the date of the contract.
5. Section 166 – Duties of Directors
Directors are required to act in accordance with the company’s articles,
exercise their duties in good faith, and work with due care, skill, and
diligence. They are prohibited from assigning their office to another
person or using their position for personal gain or to benefit relatives.
6. Provisions for Class Action and Whistleblower Protection
The Act includes clauses that allow shareholders to take class action
against company mismanagement and protects whistleblowers under
the vigil mechanism.

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 7. Corporate Social Responsibility (CSR)
The Companies Act introduced provisions requiring certain companies to
allocate a portion of their profits for Corporate Social Responsibility
activities, ensuring accountability towards social development.

Kotak Committee on Corporate Governance (2017)

Objective:
To enhance the standards of corporate governance in Indian listed companies
and improve transparency, accountability, and investor confidence.

6.8.1 Recommendations Without Modifications

1. Board Competency Disclosure:
o Annual report must list the skills and expertise required by board
members.
o Disclose existing competencies of current board members.
2. Independent Directors’ Eligibility:
o Board must certify that independent directors meet the eligibility
criteria of the SEBI LODR Regulations.
o Obtain a declaration from each independent director.
o Members of promoter group cannot be appointed as independent
directors.
3. Nomination and Remuneration Committee:
o Responsible for identifying suitable candidates for senior
management.
o Recommends appointment, removal, and remuneration policies.
o At least 50% of its members must be independent directors.
4. Audit Committee Role:
o Must review utilization of funds in subsidiaries where amount
exceeds ₹100 crores or 10% of subsidiary’s asset size, whichever is
lower.
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 5. Limit on Directorships:
o A person can be a director in a maximum of 8 listed companies.
o Of these, no more than 7 can be as an independent director.
6. Secretarial Audit:
o Mandated for all listed companies and their subsidiaries.
o To be disclosed along with the audit report under Regulation 24A
of LODR.
7. Definition and Disclosure of Related Parties:
o Anyone from the promoter/promoter group holding 20% or more
shares is considered a related party.
o Half-yearly disclosure of related party transactions on the
company website within 30 days of publishing financial results.
8. Voting Rights for Related Parties:
o Related parties can cast a negative vote in matters concerning
related party transactions.

6.8.2 Recommendations With Modifications

1. Separation of Key Roles:
o Listed companies with over 40% public shareholding must
separate the roles of Chairperson and Managing Director/CEO.
2. Women Independent Director:
o Every listed company must appoint at least one woman
independent director by October 2018.
3. Royalty Payments Approval:
o If royalty payments exceed 5% of annual consolidated turnover,
shareholders' approval is mandatory.
4. Board Quorum Requirements:
o For boards with 6 or more directors, the quorum will be the higher
of 3 or one-third of total board strength.

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 o Applicable to the top 1,000 listed companies by April 1, 2019.
5. Annual General Meetings (AGMs):
o AGMs should be conducted within 5 months of financial year-end
(earlier limit was 6 months).
o Committee encouraged live telecast of shareholder meetings for
better accessibility.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

(Commonly referred to as SEBI LODR 2015)

1. Introduction:
The SEBI LODR Regulations, 2015 were introduced by the Securities and
Exchange Board of India (SEBI) on September 2, 2015, and came into effect
from December 1, 2015.
These regulations aim to consolidate and streamline the listing and disclosure
requirements for companies whose securities are listed on stock exchanges in
India.

2. Objective:
To enhance transparency, improve corporate governance, and protect
investors' interests by laying down detailed obligations and disclosure
requirements for listed entities.

3. Structure of SEBI LODR, 2015:

The regulations are divided into 11 chapters and several schedules.
They cover different types of listed securities such as equity shares, non-
convertible debentures (NCDs), and more.

4. Key Provisions:
A. Corporate Governance (Regulations 17 to 27):
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  Board Composition (Reg. 17):
o At least one woman director.
o Independent directors to make up at least one-third (or half in
certain cases).
 Audit Committee (Reg. 18):
o Minimum 3 directors, majority independent.
 Nomination & Remuneration Committee (Reg. 19):
o Majority of members must be independent.
 Stakeholders Relationship Committee (Reg. 20):
o Looks into investor grievances.
 Risk Management Committee (Reg. 21):
o For top 1000 listed entities (based on market cap).

B. Disclosure Requirements:
 Quarterly and Annual Financial Results (Reg. 33).
 Shareholding Pattern (Reg. 31).
 Related Party Transactions (Reg. 23):
o Mandatory disclosure and approval for material transactions.
 Corporate Governance Report (Schedule V).
 Material Events Disclosure (Reg. 30):
o Events that can affect share price must be disclosed within 24
hours.

C. Independent Directors:
 Must meet strict eligibility criteria.
 Cannot be part of promoter group.
 Their resignation must be disclosed to the stock exchange.

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D. Compliance and Penalties:
 Companies must submit a compliance certificate signed by the CEO/CFO
and a practicing company secretary.
 Non-compliance can lead to penalties, suspension, or even delisting of
securities.

5. Amendments and Updates:

SEBI regularly updates LODR to enhance governance.
Key updates have included:
 Kotak Committee recommendations (2018).
 Enhanced role of independent directors.
 Improved disclosures on ESG, related party transactions, etc.

6. Importance of SEBI LODR 2015:

 Brings uniformity across stock exchanges.
 Enhances investor confidence.
 Promotes fair practices in corporate functioning.
 Provides checks and balances for management action

UNIT 5
Satyam Computer Services Ltd. Scandal (2009)
Type: Corporate Accounting Fraud
Founder & Chairman: B. Ramalinga Raju
Headquarters: Hyderabad, India
Industry: IT Services

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Nature of the Scam:
Satyam’s founder, Ramalinga Raju, falsified financial statements for years,
inflating revenue, profits, and cash balances to mislead investors and
regulators.
 ₹5,040 crore in fictitious cash was reported on the books.
 The fraud involved manipulated invoices, fake bank statements, and
overstated assets.
 Raju admitted the scam in a letter to the board in January 2009, stating
the gap between actual and reported profits had become
unmanageable.

Mechanism of Fraud:
 Fictitious revenues were created using fake sales invoices.
 Bank statements were forged to show non-existent cash.
 Attempted to divert Satyam funds to acquire family-owned firms
(Maytas Infra & Maytas Properties).

Key Governance Failures:

 Board oversight was ineffective and approved related-party transactions
without proper scrutiny.
 Independent directors failed to challenge or detect discrepancies.
 Auditor (PwC) failed in due diligence, did not verify bank balances.
 Internal controls were weak or non-existent.
 Regulators (SEBI, ICAI) were reactive rather than preventive.

Aftermath:
 Stock value collapsed; Satyam lost investor trust.

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  The Indian government reconstituted the board and invited bids to
rescue the company.
 Tech Mahindra acquired Satyam in April 2009 and rebranded it as
Mahindra Satyam.
 Ramalinga Raju and 9 others were convicted in 2015 under charges
including criminal conspiracy and forgery.

Legal & Regulatory Impact:

 Led to reforms in corporate governance under the Companies Act 2013.
 Emphasis on auditor accountability, independent directors’ role, and
mandatory internal audit.
 Strengthened SEBI’s oversight powers.

Key Lessons:
 Transparency and ethical leadership are essential for corporate
governance.
 Auditors must maintain independence and verify financial claims.
 Stronger regulatory frameworks and vigilant boards are crucial to
prevent such fraud

Kingfisher Airlines: A Case of Corporate Governance Failure in India

Kingfisher Airlines, once a prominent name in Indian aviation, collapsed due to
a series of corporate governance failures, including financial mismanagement,
regulatory non-compliance, and lack of board oversight. Founded in 2005 by
liquor baron Vijay Mallya, the airline aimed to provide luxury air travel.
However, by 2012, the company ceased operations, leaving behind over ₹9,000
crore in unpaid debt.

Key Corporate Governance Failures

1. Financial Mismanagement
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  Excessive Borrowing: Kingfisher took on massive loans from public
sector banks without a viable repayment plan. The company was
overleveraged and lacked internal financial discipline.
 Loss-Making Acquisition: The acquisition of low-cost carrier Air Deccan
in 2007 was poorly strategized, causing operational mismatches and
increased cost burdens.
 Unsustainable Cost Structure: Despite operating in a price-sensitive
market, Kingfisher adopted a high-cost full-service model, resulting in
chronic cash flow issues and operational losses.
2. Weak Board Oversight
 Dominated by Promoter: Vijay Mallya had unchecked control over board
decisions. The board lacked independence and failed to question or
correct the company's deteriorating finances.
 Conflicts of Interest: Mallya's dual role in United Breweries and
Kingfisher led to intermingling of business interests. The board failed to
monitor misuse of funds.
 No Risk Management Framework: The company lacked systems to
assess and mitigate financial and operational risks, including fuel cost
volatility and cash shortages.
3. Regulatory and Compliance Failures
 Non-payment of Statutory Dues: Kingfisher defaulted on employee
salaries, taxes, and fuel charges. It also failed to pay Provident Fund
dues, violating labor laws.
 Loan Misuse: Investigations revealed that Mallya allegedly diverted loan
funds for personal use. Lenders failed to conduct proper due diligence
before extending credit.
 Regulatory Delays: Agencies like the DGCA and RBI were slow to act. By
the time Kingfisher’s license was revoked, the damage was irreversible.
4. Operational Mismanagement
 Ineffective Expansion: Kingfisher’s international expansion in 2008
further strained its finances at a time when the domestic operations
were already under pressure.

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  Labor Crisis: Repeated salary delays led to employee unrest,
resignations, and strikes, ultimately crippling operations and prompting
the DGCA to suspend its license.

The Role of Lenders and Regulators

 Negligent Lending: Public sector banks extended unsecured loans to
Kingfisher despite its poor financials. Loans were sanctioned based on
Mallya’s brand image rather than business fundamentals.
 NPAs and Bank Losses: Once Kingfisher defaulted, its loans were
classified as Non-Performing Assets (NPAs), contributing significantly to
the banking sector’s bad loan crisis.

Vijay Mallya’s Accountability

Mallya was at the center of the misgovernance. His lavish lifestyle and
misappropriation of company funds became symbolic of crony capitalism. In
2016, he fled to the UK after being charged with fraud and money laundering.
Legal proceedings continue as Indian authorities seek his extradition.

Consequences of the Collapse

 Financial Damage: Indian banks suffered heavy losses, prompting a
review of corporate lending practices.
 Loss of Jobs and Market Impact: Thousands lost their jobs. The market
share void was later filled by budget carriers like IndiGo and SpiceJet.
 Erosion of Public Trust: The scandal undermined investor confidence in
corporate governance and regulatory systems in India.

Lessons Learned
 Sound Financial Management: Aggressive expansion without stable
revenue models is a recipe for failure.

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  Board Independence: A board must exercise oversight and challenge
management decisions.
 Regulatory Vigilance: Regulators must act promptly to prevent systemic
failures.
 Transparency and Accountability: Promoters must be held accountable
for misuse of public funds.

. Background
Nirav Modi and Mehul Choksi, in connivance with officials at PNB, fraudulently
obtained Letters of Undertaking (LoUs). These LoUs were issued without
collateral and were used to secure loans from overseas branches of Indian
banks under the pretext of importing diamonds.
The scam was facilitated by the lack of integration between the SWIFT
messaging system and the Core Banking System (CBS), allowing the
transactions to bypass core monitoring systems and remain undetected for
years.

2. Governance Failures
(a) Collusion and Fake LoUs
 SWIFT was misused to issue LoUs without recording them in CBS.
 No collateral was taken; standard approval processes were deliberately
bypassed.
 Fraudulent loans were repeatedly rolled over.
(b) Internal Control and Audit Failures
 Internal audits failed to flag discrepancies.
 Manual processes enabled manipulation.
 Branch-level operations lacked oversight, and auditors failed to identify
mismatches between SWIFT and CBS records.
(c) Regulatory Shortcomings (RBI)

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  The Reserve Bank of India, despite being the apex regulatory authority,
failed to detect the scam.
 There was no regulatory mandate for integrating SWIFT with CBS before
the scam.
(d) Inadequate Risk Management and Leadership Inaction
 No effective risk management framework was in place.
 Even after initial detection, PNB’s top management did not act swiftly or
inform regulatory authorities.
(e) Ethical Lapses and Absence of Whistleblowing
 No functioning whistleblower mechanism was available to report
internal fraud.
 Ethical leadership was lacking, which allowed systemic abuse.

3. Impact of the Scam

 Punjab National Bank and other Indian banks suffered significant
financial losses.
 The downfall of Modi and Choksi’s diamond businesses disrupted India’s
jewelry export sector.
 Public confidence in Public Sector Banks was severely damaged.
 Nirav Modi was arrested in the UK, while Mehul Choksi fled to Antigua.
 The incident sparked a global debate on transparency and accountability
in the Indian banking sector.

4. Reforms and Measures After the Scam

Integration of Systems
 RBI mandated the complete integration of SWIFT with CBS across all
banks to prevent unrecorded transactions.
Discontinuation of LoUs

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  RBI banned the issuance of LoUs and Letters of Comfort (LoCs) for
overseas credit.
Strengthening of Audit Mechanisms
 Revised auditing guidelines requiring regular cross-verification between
SWIFT and CBS entries.
Governance Reforms in Public Sector Banks
 Reforms introduced to ensure higher accountability among bank boards
and senior management.
IL&FS Group Crisis: A Corporate Governance Failure
Background
 Established: 1987
 Sponsors: Central Bank of India, HDFC, UTI
 Function: Infrastructure financing and development as a Non-Banking
Financial Company (NBFC)
 Scale: Operated through over 347 subsidiaries in sectors such as roads,
energy, water, and urban infrastructure
 Collapse: In 2018, IL&FS defaulted on ₹91,000 crores (~$12 billion)
 Nature of Crisis: A systemic financial failure driven by corporate
mismanagement and lack of regulatory oversight
Key Factors Behind the Crisis
1. Excessive Leverage and Financial Mismanagement
 Funded long-term infrastructure projects using short-term borrowings,
leading to a severe liquidity mismatch
 Continued aggressive borrowing despite deteriorating cash flows
 Engaged in rollover transactions and loan layering to mask financial
distress
2. Boardroom Failures
 The board, though composed of high-profile individuals, remained
largely passive

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  Independent directors failed to exercise critical oversight or challenge
executive decisions
 No corrective actions were taken despite visible signs of financial
instability
3. Weak Risk Management and Internal Controls
 Intra-group lending occurred without due diligence or proper checks
 Internal audit systems failed to identify or escalate risks
 Lack of adequate internal and external compliance reviews
4. Conflict of Interest and Poor Leadership
 Chairman Ravi Parthasarathy held power for over two decades,
promoting unchecked expansion
 Several decisions appeared to benefit individuals or related entities
 Many projects lacked commercial viability and were stalled due to
bureaucratic hurdles
5. Regulatory Lapses
 Regulatory bodies like RBI, SEBI, and the Ministry of Corporate Affairs
failed to act on early warning signals
 There was poor coordination among regulators
 Credit rating agencies continued to issue high ratings, misguiding
investors about the company’s actual financial health
Impact on the Financial Sector
Systemic Risk
 IL&FS default triggered a ripple effect across the financial sector
 Banks, NBFCs, and mutual funds with exposure suffered significant losses
 Led to a broader NBFC liquidity crisis and weakened investor confidence
Government and Legal Response
Government Intervention

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  In October 2018, the central government dissolved the existing IL&FS
board
 A new board led by Uday Kotak was appointed to manage the resolution
process
Restructuring and Recovery
 Asset sales and liquidation of subsidiaries were initiated to repay
creditors
 Recovery has been slow due to the unviable nature of many projects
Legal Proceedings
 Serious Fraud Investigation Office (SFIO) and Enforcement Directorate
(ED) launched investigations
 Arrests and legal actions were taken against key executives, including
Ravi Parthasarathy
Impact on Investor Confidence
 Shattered trust in NBFCs and infrastructure financing models
 Institutional investors and mutual funds faced heavy losses due to their
exposure
Learnings from the IL&FS Crisis

Area of Failure Key Lesson

Boards must function independently and with

Corporate Governance
accountability

Risk Management Align financing strategies with project durations

Regulatory Oversight Timely, coordinated regulatory action is critical

Honest disclosures and accurate accounting are

Financial Transparency
essential

Leadership Unchecked leadership over long periods can lead to

Accountability systemic risks

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YES BANK CRISIS
Modus Operandi / Structure
 Founded in 2004 by Rana Kapoor and Ashok Kapur, Yes Bank adopted
an aggressive growth strategy and quickly rose to prominence among
private banks in India.
 The bank engaged in high-risk lending to sectors like real estate,
infrastructure, and media.
 Loans were extended to non-creditworthy borrowers, leading to a sharp
rise in Non-Performing Assets (NPAs).
 Weak internal controls and ineffective risk management systems failed
to assess borrower creditworthiness.
 The bank’s operations suffered, leading to a liquidity crisis in early 2020,
plummeting share prices, and loss of investor confidence.

Corporate Governance Failure

1. Faulty Lending & Risk Management
o Aggressive and indiscriminate lending without proper risk
assessment.
o Over-concentration in a few high-risk sectors.
o Poor credit appraisal and monitoring systems.
2. Board-Level Failures
o The board failed to oversee lending decisions and ignored red flags
from auditors and regulators.
o Independent directors did not act effectively despite obvious
financial irregularities.
3. Conflict of Interest
o Rana Kapoor, CEO and co-founder, was involved in conflicted
transactions and favoritism in lending.
o Weak internal checks allowed for unchecked executive control and
influence.
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 4. Audit and Regulatory Lapses
o External auditors failed to report asset quality issues and financial
irregularities accurately.
o RBI’s response was delayed and reactive, allowing the crisis to
deepen.

Aftermath
 Resignation of Rana Kapoor in 2019 and initiation of legal proceedings
against him by enforcement agencies.
 Government-led bailout in March 2020:
o ₹10,000 crore rescue plan led by State Bank of India (SBI) and
other institutions.
 Governance Reforms:
o Board restructured for independence and oversight.
o Strengthened risk management and compliance systems.
 Market Confidence restored gradually through transparency, new capital
infusion, and better governance mechanisms.
ICICI Bank Corporate Governance Crisis (2018)
Key Issue:
The scandal involved conflict of interest, unethical lending, and regulatory
failures, centered around Chanda Kochhar, the then-CEO of ICICI Bank, and her
role in sanctioning a ₹3,250 crore loan to Videocon Group, which had financial
ties with her husband, Deepak Kochhar.

Where It All Started:

 In 2012, ICICI Bank gave a ₹3,250 crore loan to Videocon Group, led by
Venugopal Dhoot.
 Dhoot later invested ₹64 crore in NuPower Renewables, a company
owned by Chanda Kochhar’s husband.
 This raised suspicions of quid pro quo and conflict of interest.
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Key Governance Failures
1. Conflict of Interest and Lack of Disclosure
 Chanda Kochhar did not disclose personal ties that conflicted with her
professional responsibilities.
 She did not recuse herself from loan approval discussions related to
Videocon.
2. Weak Oversight by the Board of Directors
 No early investigation into the conflict of interest.
 The board initially supported Kochhar, failing to bring in external
counsel.
 Took action only after media and public pressure, causing reputational
damage.
3. Lapses in Risk Management and Lending
 ICICI lent to financially weak companies without proper due diligence.
 Raised concerns about ineffective risk evaluation and credit policies.
4. Failures of External Auditors and Regulators
 Auditors did not flag related-party transactions or lending anomalies.
 RBI and SEBI failed to detect and prevent the scandal early.
5. Lack of Ethical Leadership & Whistleblower Mechanisms
 Kochhar's behavior reflected poor ethical standards.
 No strong internal reporting system or protection for whistleblowers.

Consequences of the Crisis

a) Chanda Kochhar’s Resignation and Investigation
 Resigned in October 2018 after an internal inquiry.
 Found guilty of violating the ICICI Bank Code of Ethics.

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  Denied severance pay, bonuses, and stock options.
b) Reputational Damage
 ICICI Bank’s public image and share value declined.
 Loss of stakeholder confidence and increased scrutiny.
c) Legal and Regulatory Action
 CBI filed an FIR against Kochhar, her husband, and Dhoot.
 Investigated for criminal conspiracy, corruption, and fraud.
d) Governance Reforms at ICICI Bank
 Introduced stricter conflict of interest policies.
 Improved internal controls and risk assessment frameworks.
 Revamped board structure to enhance oversight.

Common Governance Problems in Corporate Failures

1. Lack of Transparency and Disclosure

 Poor Financial Reporting: Misleading financials (e.g., Satyam, Enron)
concealed real performance.
 Non-disclosure of Conflicts of Interest: Hidden personal interests led to
biased decisions (e.g., Yes Bank - Rana Kapoor’s undisclosed conflicts).

2. Weak Board Oversight

 Lack of Supervision: Boards ignored risky executive actions (e.g.,
Kingfisher, IL&FS).
 Ineffective Independent Directors: Failed to challenge management
(e.g., Satyam, ICICI Bank).

3. Risk Management Shortcomings

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  Inadequate Risk Assessment: Ignored potential risks in lending and
projects (e.g., Yes Bank, PNB scam).
 High-Risk Exposure Without Controls: Over-investment in risky ventures
led to downfall (e.g., IL&FS).

4. Weak Internal Controls

 Poor Internal Audits: Audits failed to detect fraud (e.g., Satyam, Enron).
 Ignored Warning Signs: Red flags not acted upon (e.g., Kingfisher).

5. Regulatory and Compliance Failures

 Weak Regulatory Oversight: Delayed or insufficient action by regulators
(e.g., Yes Bank, ICICI).
 Loose Implementation of Rules: Sloppy compliance enabled fraud (e.g.,
PNB).

6. Ethical Failures & Conflict of Interest

 Management Misconduct: Self-serving decisions by leadership (e.g.,
Satyam).
 Board Conflict of Interest: Lack of independence undermined
governance (e.g., Kingfisher).

7. Poor Corporate Culture and Leadership

 Lack of Ethical Culture: Risky behavior encouraged (e.g., Enron, Satyam,
Kingfisher).
 Ineffective Whistleblower Systems: Absence of protective reporting
channels led to unchecked fraud (e.g., Enron).

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