SYMBIOSIS LAW SCHOOL, PUNE

CORPORATE GOVERNANCE AND FINANCE

Alternative Assessment

K Bashi Roy
17010126416
BBA LLB (Hons.)
Division-E
Q.1 Elaborate the concept of corporate governance with the help of recommendations of
Kumara Mangalam Committee report in India.

The Securities and Exchange Board of India (SEBI) appointed a committee on corporate
governance on 7 May 1999, with 18 members under the chairmanship of Kumar Mangalam Birla
with a view to promoting and raising the standards of corporate governance. The committee’s
terms of reference were: (a) to suggest suitable amendments to the listing agreement (LA)
executed by the stock exchanges with the companies and any other measures to improve the
standards of corporate governance in the listed companies in areas such as continuous disclosure
of material information, both financial and non-financial, manner and frequency of such
disclosures, responsibilities of independent and outside directors (b) to draft a code of corporate
best practices and (c) to suggest safeguards to be instituted within in the companies to deal with
insider information and insider trading.

The committee submitted its famous and oft-quoted report to SEBI after several sittings of
debates and deliberations. The Kumar Mangalam Birla Committee’s report is indeed a veritable
landmark in the evolution of corporate governance in India.

The Birla Committee’s recommendations consist of mandatory recommendations, and non-

mandatory recommendations:
Mandatory Recommendations:

 The mandatory recommendations apply to the listed companies with paid up share capital
of 3 crore and above.
 Composition of board of directors should be optimum combination of executive & non-
executive directors.
 Audit committee should contain 3 independent directors with one having financial and
accounting knowledge.
 Remuneration committee should be setup
 The Board should hold at least 4 meetings in a year with maximum gap of 4 months
between 2 meetings to review operational plans, capital budgets, quarterly results,
minutes of committee’s meeting.
 Director shall not be a member of more than 10 committee and shall not act as chairman
of more than 5 committees across all companies
 Management discussion and analysis report covering industry structure, opportunities,
threats, risks, outlook, internal control system should be ready for external review
 Any Information should be shared with shareholders in regard to their investments.

Non- Mandatory Recommendations

 Role of chairman
 Remuneration committee of board
 Shareholders’ right for receiving half yearly financial performance.
 Postal ballot covering critical matters like alteration in memorandum
 Sale of whole or substantial part of the undertaking
 Corporate restructuring
 Further issue of capital
 Venturing into new businesses

SEBI’s Response

SEBI considered and adopted in its meeting held on 25 January 2000, the
recommendations of the Kumar Mangalam Birla Committee on Corporate Governance appointed
by it. In accordance with the guidelines provided by SEBI, the stock exchanges in India have
modified the listing requirements by incorporating in them a new clause (Clause 49), so that
proper disclosure for ensuing corporate governance is made by companies.

SEBI’s Code of Corporate Governance requires that the following information be placed by a
company before the board of directors periodically:

 Annual operating plans and budgets and any updates

 Capital budgets and any updates
 Quarterly results for the company and its operating divisions or business segments
 Minutes of audit committee meetings
 Information on recruitment and remuneration of senior officers just below the board level
 Material communications from government bodies
 Fatal or serious accidents, dangerous occurrences, or any material effluent pollution
problems
 Details of any joint venture or collaboration agreement
 Labour relations
 Material transactions which are not in the ordinary course of business
 Disclosures by the management on material transactions, if any, with potential for
conflict of interest
 Quarterly details of foreign exchange exposures and risk management strategies
 Compliance with all regulatory and statutory requirements

These recommendations were to apply to all the listed private and public sector companies, their
directors, management, employees and professionals associated with such companies. The
Committee recognizes that compliance with the recommendations would involve restructuring
the existing boards of companies. It also recognizes that smaller ones will have difficulty in
immediately complying with these conditions.

Q.2 Describe and analyze the causes of corporate frauds in India. 

 White Collar Crimes are the type of crimes that are committed by respectable persons,
holding enviable positions, either in public or private entities. It is practically very difficult for
the bureaucratic agencies to track and detect such frauds and probably because such activities are
carried out in much secrecy and goes un-notified. Such crimes are defined by the Federal Bureau
of Investigation as, "Illegal acts characterized by deceit, concealment or violation of trust, which
are not dependent upon the application or threat of physical force or violence". The FBI says
that in cases of white-collar crime, "Individuals and organizations commit these acts to obtain
money, property or services; to avoid the payment or loss of money or services; or to secure
personal or business advantage". 

In the broadest sense, a fraud is an intentional deception made for personal gain or to damage
another person/ entity. ‘Fraus Omnia Vitiate’ - Fraud vitiates everything. Corporate fraud takes
place when a corporation purposefully provides dishonest information with the purpose of
obscuring truth and deceiving the recipient of the data with the intent to gain an advantage.

Corporate Frauds in India

India has become a corporate hub in past decades. Corporate frauds have become a threat
to the society and financial Industry specifically as financial loss by these kinds of frauds are
much greater than loss from robberies, theft, swindling etc. The society cannot survive with them
but cannot even live even without them In India, organizations irrespective of their gamut and
orbit are subject to fraud. It causes enormous consequences to the organization, stakeholders and
general public. Our country being a silent spectator of several corporate frauds, few of them
being the Harshad Mehta scam of 1992, Satyam scandal in 2009, Saradha Chit Fund scam and
Sahara Fraud Case. These infamous scandals have adversely affected the development of the
economic sector of our country.

A corporate fraud occurs when a company or an entity deliberately changes and conceals
sensitive information which then apparently makes it look healthier. Companies adopt various
modus-operandi to commit such corporate frauds, which may include miss-information in the
prospectus, manipulation of accounting records, debt hiding etc. The aspect of falsification of
financial information includes false accounting entries, false trades for inflation of profits,
disclosure of price sensitive information which comes under the ambit of insider trading and
showing false transactions which result in attracting more investors and lenders for funding.
The first successful trial of a financial scandal in independent India was the Mundhra Scam, in
which Hon'ble Justice M.C. Chagla made certain critical observations about the big business
magnate Mundhra who wanted to build an industrial empire entirely out of dubious means.

Types of Frauds:

There are many types of frauds like Fraudulent Financial Statements, Employee Fraud, Vendor
Fraud, Customer Fraud, Investment Scams, Bankruptcy frauds and miscellaneous. Some of the
common types of frauds are:

1. Financial frauds: Manipulation, falsification, alteration of accounting records,

misrepresentation or intentional omission of amounts, misapplication of accounting
principles, intentionally false, misleading or omitted disclosures.

2. Misappropriation of Assets: Theft of tangible assets by internal or external parties, sale

of proprietary information, causing improper payments.

3. Corruption: making or receiving improper payments, offering bribes to public or private

officials, receiving bribes, kickbacks or other payments, aiding and abetting fraud by
others.

4. Insider trading: Insider trading is defined as a trading in company’s stocks or securities

by persons who are predicted to gain access to the subtle information in respect to such
securities. Taking advantage of such information is prohibited under the respective
securities laws of different countries. The Rajat Gupta Case is one of the biggest scandals
in history of US for the offence of insider trading.

5. Corporate espionage: The term ‘corporate espionage’ has become synonymous with
industrial espionage. With the increase in competition in business ventures, corporates
started resorting to innovative methods to obtain information about other companies or
competitors. Officials steal the trade secrets by removing or copying confidential or
valuable information of a competitor for its company’s benefit. Corporates gets benefited
financially through this kind of frauds.

Corporate Frauds under Companies Act, 2013

The Companies Act, 2013, is the legislation which focusses on issues related to corporate frauds.
Fraud in relation to affairs of a company or any corporate body as defined in S.447 of the
Companies Act 2013, includes any act, omission, concealment of any fact or abuse of position
committed by any person or any other person with the connivance in any manner, with intent to
deceive, to gain undue advantage from, or to injure the interests of the company or its
shareholders or its creditors or any other person, whether or not there is any wrongful gain or
wrongful loss.

In order to amount to Fraud, an act must be confined to acts committed by a party to contract
with an intention to deceive another party or his agent or to induce him to enter into a contract.
Fraud, which vitiates the contract, must have a nexus with the acts of the parties entering into the
contract. This definition highlights the precondition to prove the intention of the person who has
committed fraud. If that person has willingly committed a fraud, then he will be punished. Here
the person means himself or his agent. The acts which include fraud are wrong suggestions or
concealment of facts or false promises or any fraudulent act to deceive others.

The causes can be rooted to the following 5 major categories:

1) Personal Ethics
2) Decision Making Processes
3) Organizational Culture
4) Unrealistic Performance Goals
5) Leadership

First, business ethics are not completely different from personal ethics which are the generally
accepted principles of right and wrong governing the conduct of individuals. Our personal ethical
code exerts a profound influence on the way we behave as businesspeople. It follows that the
first step to establishing a strong sense of business ethics is fir a society to emphasize strong
personal ethics.

Many studies of unethical behavior in a business setting have concluded that sometimes
corporate do not realize they are behaving unethically primarily because they simply fail put a
thought if the decision that they have made is ethical or not. The fault lies in the processes that
don’t incorporate ethical considerations into business decision making.
One of the major causes of corporate frauds is that most organizational cultures have been
deemphasizing business ethics (as seen in the cases above), thus reducing all decisions to the
purely economic level. Values and norms shape the culture of a corporate entity, and culture had
an important influence on the ethics of business decision making.

Unrealistic performance goals and pressure from the parent company, the economy and the
society at large which can be attained only by cutting corners or acting in an unethical manner
contribute to a large extent of the corporate frauds.

But the main root of all lies in the leaders of the corporate entity. Leaders help establish the
culture of the organization, and they set the examples that others follow. Other employees in the
corporate often adopt and adapt to the methodology or behavior that the leaders enact and if the
leaders don’t behave in an ethical manner, there is a major chance the employees of the corporate
will not either.

Infamous corporate scams in India

 Harshad Mehta scam: In April 1992, the Indian Stock market crashed and Harshad
Mehta who was considered as architect for Bull Run was blamed for the crash. It grabbed
headlines for the notorious BSE security scam when veteran columnist Sucheta Dalal
wrote an article in India's national daily The Times of India13. He manipulated Indian
banking system to siphon off the funds from the banking system and used liquidity to
build large positions in selected group of stocks. He diverted funds to the tune of Rs.
4000 crores from the banks to stock brokers. He was later charged with multiple criminal
offences.
 Satyam scam: Ramalinga Raju was held guilty by trial court which sentenced him to
seven years rigorous imprisonment with fine of Rs. 5 crores. The nation all over was
shocked and scandalized with the scam. It is also known as India’s Enron. It was
probably the biggest corporate scam from one of the largest IT Companies in India i.e.,
Satyam Computer Services Limited (M/s SCSL). The scam triggered the loss to investors
to the tune of Rs. 8000 crores. Ramalinga Raju confessed in his letter that he cooked
books of accounts of the company and admitted that the accounting entries were wrongly
inflated. He overstated the income nearly every quarter over the course of several years in
 order to meet investor’s expectations. Weak independent directors and negligence of
auditors also contributed to the scam.

Infamous corporate scams abroad

 Enron scandal: With Enron scandal, The United States of America witnessed the biggest
corporate collapse in its corporate history in the early days of December, 2001, which
sent shock waves across the whole business world. Enron, until the collapse, was held in
high esteem by well-known corporate observers, analysts and corporate rating agencies in
the United States of America. Many executives of Enron were indicted and charged for
several fraudulent activities, ranging from insider trading, corrupt business practices,
money laundering, falsification of accounting records, financial misappropriation etc.
They were processed in courts and several of them were then sentenced to prison. As a
consequence of the Enron Scandal, the US enacted new regulations and legislations to
increase the relevant business rules to ensure accuracy of financial reporting for public
companies, one of them being the Sarbanes-Oxley Act, 2002.