And why Enron, Satyam Computers and Nepal
Development Bank collapsed
Presented by: GROUP 1, EMBA 2009, Corporate Law
Bibek Pandeya
Bikash Shrestha
Sandesh Dhakal
Sanjeeb Jha
Sulabh Tuladhar
Introduction to OECD Principles

The integrity of businesses and markets
is central to the vitality and stability of
our economies.

Good corporate governance contributes
to growth and financial stability by
underpinning market confidence,
financial market integrity and economic
efficiency.
Introduction to OECD Principles

The OECD (Organization of Economic
Corporations Development) Principles of
Corporate Governance provide specific
guidance for policymakers, regulators
and market participants in improving the
legal, institutional and regulatory
framework that underpins corporate
governance, with a focus on publicly
traded companies.
Introduction to OECD Principles

They also provide practical suggestions
for stock exchanges, investors,
corporations and other parties that have
a role in the process of developing good
corporate governance. They have been
endorsed as one of the Financial
Stability Forum’s 12 key standards
essential for financial stability.
Introduction to OECD Principles

The OECD Principles were originally
issued in 1999 and have since become
the international benchmark for
corporate governance, forming the basis
for a number of reform initiatives, both
by governments and the private sector.
Key Principles and issues that
OECD addresses

The Principles cover 6 key areas of
corporate governance:
1.
2.
3.
4.
5.
6.
Ensuring the basis for an effective corporate
governance framework.
The rights of shareholders.
The equitable treatment of shareholders.
The role of stakeholders in corporate
governance.
Disclosure and transparency.
The responsibilities of the board.
Satyam Computers and Corporate
Governance

In the context of Satyam Computer's new scam, while
adopting the present model of Corporate Governance
there was discussions over its suitability for a country like
India.

The reason - they were copying western model of
corporate governance.

Professor J. Rama Varma of IIM Bangalore had
extensively commented on the unsuitability of the
Western Code of Corporate Governance in his well
researched paper on the subject titled 'Corporate
Governance in India: Disciplining the dominant
shareholder'. J.Rama Varma did research on 1997.
Satyam Computers and Corporate
Governance

Satyam is a company which had won the Golden Peacock
Global Award for excellence in Corporate Governance.
This company was named the winner by the World
Council for Corporate Governance as recently as in
September 2008. This is after approving the false balance
sheet presented in the Board of Directors.

The Satyam story poses a big question over the credibility
of auditors in general, as Price Waterhouse Coopers was
the auditor of the company. The bankers to Satyam
included Bank of Baroda, BNP Paribas, ICICI, HDFC,
CitiBank, HSBC. Even after placing false account details
in its balance sheet no bank came out and asked details
about it.
Satyam Computers and Corporate
Governance

Satyam was also being accused by the World
Bank for bribing its employees to get certain
contracts awarded in the company's favor.

In one of the biggest frauds in India’s
corporate history, B. Ramalinga Raju, founder
and CEO of Satyam Computers, India’s fourthlargest IT services firm, announced on
January 7 that his company had been
falsifying its accounts for years, overstating
revenues and inflating profits by $1 billion.
Satyam’s reason for failure

On the basis of ensuring for an effective
corporate governance framework, what
should have promoted transparent and
efficient markets, along with being
consistent with the rule of law and clearly
articulate the division of responsibilities
among different supervisory, regulatory and
enforcement authorities, it showed that the
company had been feeding investors,
shareholders, clients and employees a
steady diet of lies.
Satyam’s reason for failure

The rights of shareholders and key ownership
functions where the corporate governance
framework should have protected and
facilitated the exercise of shareholders’ rights,
it was mentioned in a letter addressed to the
board, the stock exchanges and the market
regulator Securities & Exchange Board of
India (SEBI) that Satyam’s profits were inflated
over several years to “unmanageable
proportions” and that it was forced to carry
more assets and resources than its real
operations justified.
Satyam’s reason for failure

The equitable treatment of shareholders objective states
that the corporate governance framework should ensure
the equitable treatment of all shareholders, including
minority and foreign shareholders. All shareholders should
have the opportunity to obtain effective redress for
violation of their rights.

Satyam’s stocks were listed on the Bombay Stock
Exchange as well as the New York Stock Exchange.
International regulators could swing into action if they
believed U.S. laws had been broken. At least two U.S. law
firms have filed class-action lawsuits against Satyam, but
given the company’s precarious finances, it is unclear how
much money investors will be able to recover.
Satyam’s reason for failure

The corporate governance framework
should recognize the rights of
stakeholders established by law or
through mutual agreements and
encourage active co-operation between
corporations and stakeholders in
creating wealth, jobs, and the
sustainability of financially sound
enterprises.
Satyam’s reason for failure

Also, the corporate governance framework should
ensure that timely and accurate disclosure is made
on all material matters regarding the corporation,
including the financial situation, performance,
ownership, and governance of the company.

But, it was acknowledged that Satyam’s balance
sheet included Rs. 7,136 crore (nearly $1.5 billion) in
non-existent cash and bank balances, accrued
interest and misstatements. It had also inflated its
2008 second quarter revenues by Rs. 588 crore
($122 million) to Rs. 2,700 crore ($563 million), and
actual operating margins were less than a tenth of
the stated Rs. 649 crore ($135 million).
Satyam’s reason for failure

The corporate governance framework
should ensure the strategic guidance of
the company, the effective monitoring of
management by the board, and the
board’s accountability to the company
and the shareholders.

This is where Satyam failed miserably.
Decision of the Court

Hyderabad, Jan 28: A local court in India
dismissed the bail petitions of disgraced
Satyam founder B. Ramalinga Raju, his
brother and former MD of the company
and its ex-CFO, V. Srinivas, but their
counsel stated that a review petition will
be filed or they will go to a higher court.
Conclusion and Analysis

B. Ramalinga Raju, who is politically influential,
disclosed details of the fraud in a resignation letter
to the company’s board of directors forwarded to
stock exchange authorities as well as the regulator
of the country’s capital markets, the Securities and
Exchange Board of India (SEBI).

Of the revenue reported as of Sep.30, 2008, the
letter said, almost 1.03 billion dollars, or 95
percent, never existed.
Conclusion and Analysis

An alarming aspect of the episode was
that B. Ramalinga Raju acknowledged
that his company’s financial records had
been fudged and manipulated for the
"last several years".

"It was like riding a tiger, not knowing
how to get off without being eaten,"
wrote the disgraced Raju in his letter.
Conclusion and Analysis

"It’s a wake-up call for the Indian
corporate sector," said Ashok Kumar
Bhattacharya, national managing editor
of Business Standard newspaper in an
exclusive interview to IPS. "Companies
have to stick to the rule-book," he
added.
Enron and Corporate Governance

“When a company called Enron… ascends
to the number seven spot on the Fortune
500 and then collapses in weeks into a
smoking ruin, its stock worth pennies, its
CEO, a confidante of president, more or
less evaporated, there must be lessons in
there somewhere.”
-Daniel Henninger,
The Wall Street Journal
Enron and Corporate Governance

With the demise of Enron, corporate
governance has come to the forefront of
economic discussion. The fall of Enron
was a direct result of failed corporate
governance and consequently has led to
a complete re-evaluation of corporate
governance practice in the United
States.
Reasons for Enron’s failure

According to Newsweek's estimates,
Enron lost $2 billion on broadband, $2
billion on water, $2 billion on a Brazilian
utility and $1 billion on an electricity
plant in India.

To hide their debt, Enron engaged in
"aggressive accounting."
Reasons for Enron’s failure

They created partnerships with nominally
independent companies.

Those companies were headed by Enron execs, and
backed, ultimately, by Enron stock.

But Enron did not count their "partners"' debt as its
own, using "off-balance-sheet" accounting.

Enron also found ways to count loans from banks as
"profit."

These all resulted in Enron’s bankruptcy.
Reasons for ENRON’s failure

The Enron failure demonstrated a failure of
corporate governance, in which internal control
mechanisms were short-circuited by conflicts
of interest that enriched certain managers at
the expense of the shareholders.

Enron’s actions appear to have been
undertaken to mislead the market by creating
the appearance of greater creditworthiness
and financial stability than was in fact the
case. The market in the end exercised the
ultimate sanction over the firm.
Reasons for ENRON’s failure

There is no evidence that existing regulation is
inadequate to solve the problems that did occur.
Had Enron complied with existing market
practices, not to mention existing accounting and
disclosure requirements, it could not have built the
house of cards that eventually led to its downfall.

It is likely that additional government regulation, by
increasing moral hazard and decreasing legal
certainty, could have the unintended consequence
of making future failures and market instability
more likely along with increasing the cost and
decreasing the availability of risk management
tools.
Approaches to Balance Corporate
Power

Corporate governance structures have
traditionally been a private matter
between shareholders and managers
with some state law restrictions, but the
Sarbanes-Oxley Act has made
structures governing the conduct of the
corporation a matter of federal law.
Sarbanes-Oxley Act

Sarbanes-Oxley Act addresses the
perceived weaknesses in auditing,
reporting and corporate governance of
U.S public companies and has been
hailed as the most dramatic change to
federal securities law in over 50 years.
Sarbanes-Oxley Act

Some of the provisions of Sarbanes-Oxley Act and new
stock exchange rules can be listed as:
 Strengthening corporate responsibility through governance.
 Listed company must have a majority of independent directors.
 Non management or independent directors must meet without






management in regularly scheduled executive sessions.
The Audit Committee is responsible for the fiscal integrity of the
corporation.
It is illegal for officers and directors to fraudulently influence an
independent auditor.
Company Codes of Ethics is essential and changes are to be
notified.
Accelerated reporting of and new restrictions on trading by
insiders.
Future personal loans to officers and directors are prohibited.
Real time disclosures of important changes.
Problem

The systemic problems at Enron arose
because of an imbalance of power in favor of
top management in corporate organizations.

The shift in power from shareholders to
management started with the appearance of
large corporations as a result of the Industrial
Revolution, when small capitalists pooled their
resources to finance bigger ventures that were
operated by professional managers referred to
subsequently as “managers for hire.”
What went wrong with Enron

One of the obvious systemic causes of the Enron scandal is the
legal and regulatory structure.

A private company like Enron hired and paid its own auditors.

Most large companies like Enron are allowed to manage their
own employee pension funds.

Most companies like Enron have codes of ethics that prohibit
managers and executives from being involved in another
business entity that does business with their own company. But
these codes of ethics are voluntary and can be set aside by the
board of directors. The legal structure largely allows managers
to enter these arrangements, which constitute a conflict of
interest.
Nepal Development Bank Limited

Nepal Development Bank Limited (NDBL) has been
established under the Company Act, 2053 (1997) in
March 19,1998.

It is the first national level development bank
established by the private sector in Nepal.

It has commenced its operation January 31, 1999 as
per Development Bank Act, 2052 (1996).

Since May 4, 2006 it has been imparting its services
in accordance with Bank and Financial Institution
Act, 2063.
Principles of Corporate
Governance in Banking Sector
OECD focus on the following critical elements of desirable
corporate Governance for the banks.

Board members should be qualified for their positions,
have a clear understanding of their role in corporate
governance and be able to exercise sound judgment
about the affairs of the bank.

The board of directors should approve and oversee the
bank’s strategic objectives and corporate values that are
communicated throughout the banking organization.

The board of directors should set and enforce clear lines
of responsibility throughout the organization.
Principles of Corporate
Governance in Banking Sector

The board and senior management should effectively utilize the
work conducted by the internal audit function, external auditors,
and internal control functions.

The board should ensure that compensation policies and
practices are consistent with the bank’s corporate culture, longterm objectives and strategy, and control environment

The bank should be governed in a transparent manner.

The board and senior management should understand the
bank’s operational structure, including where the bank operates
in jurisdictions, or through structures, that impede transparency
(“know-your structure”)

The board should ensure that there is appropriate oversight by
senior management consistent with board policy
Liquidation Decision

Under clause 74 of the Banks and Financial Institutions Act,
NRB must file a case to begin of liquidation of a financial
institution whose damages are beyond repair. Before filing
the case NRB must seek justification from the bank.

Explanation sought by NRB to NDB on June 3,2009 – why it
should not be liquidated.

NDB submitted its reply seeking time till October 2009,
saying new investors would be ready to invest in it then.

Seized all cash, cheques and securities.

The central bank has stated that these officials committed
crimes under Clause 95 of the NRB Act 2001 and embezzled
bank assets and cash, which is a crime under Clause 1 and 2 of
the Civil Code (Fraud).

NRB has sought action against the culprits as per Clause 96 of
the NRB Act and Clause 4 of the Civil Code. "Those officials
abused their authority to take illegal financial benefit, while
causing serious damage to the financial health of the bank and
ultimately pushing it to bankruptcy.

Nepal Rastra Bank on July 9,2009 requested the Home Ministry
to take action against Nepal Development Bank (NDB)’s patron
Uttam Pun and chairman Amar Gurung as well as other senior
management members. They have been charged of misusing
NDB assets worth Rs. 1.08 billion.
Liquidation Decision

Accumulated loss 678.6 million by the end of
mid-March, 2009. Non-performing loan 30
percent.

Required capital adequacy ratio 11 percent.
NDB's capital adequacy negative by 41
percent.

Issued Right Shares – to increase capital.

Board members did not applied for rights
shares - bad intentions.
Liquidation Decision

NRB had repeatedly warned NDB and
declared it ‘problematic’ in 2007.

Rana Bahadur Bam and Bhoopdhoj
Adhikari at the Patan Appallate Court had
issued ex-parte stay order overturning the
NRB’s decision.

Depositors cannot withdraw their money
after NRB’s move.
According to Chairman of NDB Amar Gurung:

"NDB only has an accumulated loss of Rs 620
million, whereas Rastriya Banijya Bank has an
accumulated loss of Rs 15.13 billion, and Nepal
Bank Limited has an accumulated loss of Rs 5.51
billion; even private sector banks such as Nepal
Bangladesh Bank has an accumulated loss of
around two billion rupees, and Nepal Credit and
Commerce Bank has an accumulated loss of Rs 420
million”.

"Is NRB trying to liquidate them as well? We need an
answer. If it is not, is NRB, which should be playing a
guardian´s role, discriminating among banks?"

The Association of Nepali Development
Banks and the Association of Nepali
Finance Companies have also asked
NRB not to liquidate the bank, but to
instead, make efforts to revive its
financial condition by working together.
REVIVING NDB

Two groups have submitted proposals to investigation
officer T.R Upadhyaya to revive troubled Nepal
Development Bank (NDB).

Nimbus Group of Jagdish Agrawal alongwith World
Link, ICTC Group, Golchha Group, Kailash Chandra
Goyal, Ravi Singh Group, Guna Chandra Bista and
others have submitted one proposal.

Badri Bhattarai, the current promoter of NDB, and his
group have submitted another proposal.
Significance of Corporate
Governance in Banking Sector

Banks & FI depends on Other Peoples
Money (OPM).

There may be a gap among major
stakeholder - owners, depositors and
management.

Limited people have a right to access in
resources and decision.
CG in Nepalese Banking Sector

Nepal implemented the Basel II from 2008 July
in banking sector and good corporate
governance forms important part of Basel II.

Basel Committee has introduced principles on
Enhancing Corporate Governance for Banking
Organizations (2006 revised version of the
principles introduced in 1999)

BIS (Bank for International Settlement) OECD
(Organization of Economic Co-operation and
Development)
Existing Laws and Regulation

Banks and Financial Institutions Act
2063

Directive 6 issued by the NRB

Companies Act 2063
Issues related to Regulators
•
•
•
Lack of institutional capacity for enforcement of laws,
regulations.
Enforcement authorities themselves lack good governance.
•
Lack of accountability of employees of regulating bodies (need
to have internal rules) .
•
Lack of resources within regulator .
•
Transparent and scientific licensing policy .
•
Lack of political and leadership will.
•
Court have frequently intervened in regulatory enforcement
Issues related to BOD

Board members are interested to use
public deposits as their own assets which
is against the BAFIA 2063, article 48 .

Generally, Board members (non executive)
are liking to use power like executive or,
executive director and executive chairman
in the area of loan sanction, employee
selection and daily office activities which is
again the against the BAFIA, 2063 article
24.

Board members are prohibited take loan
from own company however, it is
general practice to take loan directly or,
indirectly.

Big houses running many same nature
business are manipulating public
deposits and transferring the fund within
the group in their own interest.
Conclusion

The responsibility for good governance
lies within the bank’s and FIs’ senior
management. Regulators can only
facilitate but not ensure improved
governance. Last but not least, we
would like to say SELF REGULATION
IS BEST REGULATION.
End of Presentation
Thank you.