Since the Satyam scam broke out, substantial changes have been made with respect to corporate governance in India
Susmit Pushkar and Susanah Naushad
The Satyam Scam in 2009, sent shock waves through India Inc and in its wake altered the corporate governance landscape in India permanently. On January 7, 2009, the Chairman of Satyam Software Services Ltd, Ramalinga Raju, confessed to a Rs 7,136 crore fraud committed by him and a few others at the company. The scam highlighted several loopholes in the Indian corporate governance structure - unethical conduct, fraudulent accounting, insider trading, oversight by auditors, ineffectiveness of Board, failure of independent directors and non-disclosure of material facts to the stakeholders.
Criminal cases were initiated against B. Ramalinga Raju and his brother Rama Raju (former Managing Director) and 8 others in connection with the matter.
On April 9, 2015 the Special Court at Hyderabad found all the ten accused guilty of cheating, criminal conspiracy, criminal breach of trust, forgery, and obstruction of evidence. B Ramalinga Raju and his brother Rama Raju were sentenced to seven years’ jail and fined ₹5 crore each. The convicted persons have appealed against the decision. The appeal is pending in the Sessions Court in Hyderabad, and are on bail.
In between, however, a host of measures have been taken by the government and regulators with respect to corporate governance in India.
In 2009, the Confederation of Indian Industries set up a task force headed by former cabinet secretary Naresh Chandra to suggest reforms. Based on the recommendations of this task force, the Ministry of Corporate affairs issued Voluntary Guidelines for Corporate Governance in 2009. The National Association of Software and Services Companies also established a corporate governance and ethics committee. This Committee suggested reforms relating to audit committees, shareholder rights, and whistle-blower policy.
The Securities and Exchange Board of India (SEBI)
In April 2014, SEBI amended the Listing Agreement to include provisions relating to establishment of a vigil mechanism, role of Audit Committee in cases of suspected fraud or irregularity, and the role of the Chief Executive Officer and the Chief Financial Officer pertaining to financial reporting and disclosure to the Audit Committee. In 2015, SEBI framed the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), applicable to all listed companies, and provided for stringent guidelines relating to reporting / disclosure of material events and actual and suspected fraud.
Companies Act, 2013:
The Companies Act 1956 came to be repealed with the new Companies Act 2013 (Act). The new Act has made a clear departure from the old Act and has brought in several measures intended to benefit the larger stakeholder community, with the resulting increase in compliance costs for the company. The Act provides for corporate fraud as a criminal offence. It sets out clear obligations for reporting of instances of fraud on auditors, cost accountants and company secretaries. It clearly outlines the responsibility and accountability of auditors and independent directors, who are expected to play a more active role. The checks and balances introduced to ensure proper governance and management in the company require the hitherto passive actors to play a vital role, in the interest of the shareholders, creditors, vendors, customers and other stakeholders in the company.
To detect and report instances of fraud and other irregularities, the Act provides for all listed companies to have a vigil mechanism, and mandates a Directors' Responsibility Statement to be a part of the Report of Board of Directors. It provides for compulsory rotation of individual auditors after five years and audit firms after ten years to rule out malpractices and financial oversight and ensure independence of auditors. The auditors are also obligated now to report instances of fraud noticed by them during the performance of their duties. The Institute of Chartered Accountants of India (ICAI) came out with a Guidance Note on Reporting on Fraud (ICAI Guidance Note, 2016). The Act also puts forth a stringent framework for related party transactions.
Serious Fraud Investigation Office (SFIO)
The SFIO under the new Act has a statutory status and has recently also been conferred the power to arrest. The SFIO has been actively investigating cases relating to corporate fraud.
In the years since the Satyam scam broke out, substantial changes have been made with respect to corporate governance in India. The use of criminal sanctions by the Parliament to regulate corporate conduct has been on the rise. The regulators and the investigative bodies are more vigilant. The increased compliance costs of companies only serves well to protect the interests of all the stakeholders in the company.(Susmit Pushkar is Partner and Susanah Naushad is Associate at Khaitan & Co)