Corporate governance in India:
Satyam case
In the past two decades, India has experienced exponential economic growth
and become a global economic leader. India is considered as an “emerging giant,”
due to its economic growth. Between 2015 and 2050 India’s GDP growth rate would
exceed that of all other major countries in the world, including China. However, its
economic strength and growth, India has a weakness regarding corporate
governance. Due to the desire of India to conquer new markets and expand beyond
India, the corporate governance evolution has accompanied the economic
transformation of the country.
The corporate governance code proposed by the Confederation of Indian Industry is
modeled on the lines of Cadbury Committee (Cadbury 1992) in the United Kingdom.
Beginning in the late 1990s, Securities Exchange Board of India (SEBI) formed a
number of committees to help formulate corporate governance standards for
publicly listed Indian companies.
A good corporate governance helps to manage more easily and keep control on the
activities of the company, allowing better management and increase profits. This
has lead to a strong competition between companies looking to increase their
increasingly profit. Good corporate governance additionally lowers the cost of
capital by reducing risk and creates higher firm valuation once again boosting real
investments.
In 2000, SEBI introduced unprecedented corporate governance reforms via Clause
49 of the Listing Agreement.5 Clause 49, which has been described as a “watershed
event in Indian corporate governance,” established a number of requirements with a
focus on the role and structure of corporate boards, internal controls, and
disclosure to shareholders. Many of the provisions, such as a minimum number of
independent directors and independent audit committees, were derived from
governance reforms adopted in developed countries, especially those in the United
States and the United Kingdom.
In January 2009, the Indian corporate community was rocked by a massive scandal
involving Satyam Computer Services, one of India’s largest information technology
companies. Satyam was rocked by two related scandals in early 2009, the first an
aborted related party transaction involving the company’s promoters, the second
the uncovering of colossal fraud in the company’s financial statements.
This scandal neither reassured people nor settled the situation. In fact in January
2009, Byrraju Ramalinga Raju, the Chairman and Founder of Satyam, resigned
after confessing to having orchestrated an accounting fraud since 2001. He
admitted to manipulating the firm’s accounts to report profits that were more than
10 times the actual figures and reported a cash balance of US$1.5 billion that was
nonexistent. It is one of the the biggest frauds in India’s corporate history, B.
Ramalinga Raju, founder and CEO of Satyam Computers, India’s fourth-largest 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.
Ramalinga Raju had been manipulating Satyam’s books since 2001 to report
results that would compare favorably with those of the biggest companies in India.
This was to maintain the firm’s corporate image as being among India’s IT pioneers.
This fraud was possible because only a handful knew what was going on in the firm.
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Corporate governance in India:
Satyam case
In fact the problem came from independent director. They were supposed to
safeguard the interests of all stakeholders. Each unit was unaware of the
performance of other departments, because each unit has its own financial sector.
The case raised a multitude of questions on the role of independent directors on the
boards of even the highest echelon of Indian companies. After Ruja was arrested the
government of India disbanded Satyam’s board. The control of the company passed
into the hands of a new board, the government stopped short of a bailout (gives any
funds to Satyam company).
Corporate Governance Response
The government believes that corporate governance norms must be redefined in
light of the Satyam episode. That is why this scandal has brought many
governmental actions such as including the arrest of several Satyam insiders and
auditors, investigations by the MCA and SEBI, and substitution of the company’s
directors with government nominees. The Satyam scandal has served as a catalyst
for the Indian government to rethink the corporate governance, disclosure,
accountability, and enforcement mechanisms in place.
The process of governance reforms in India was initiated by industry leaders. India’s
first major corporate governance reform proposal was launched by the
Confederation of Indian Industry (CII), India’s largest industry and business
association. Indeed, Indian industry leaders have continued to work closely with the
government in promoting corporate governance reforms.
The first phase of India’s corporate governance reforms was aimed at “making
Boards and Audit Committees more independent, powerful and focused monitors of
management” as well as aiding shareholders, including institutional and foreign
investors, in monitoring management.
CII began examining the corporate governance issues arising out of the Satyam
scandal. Other industry groups also formed corporate governance and ethics
committees to study the impact and lessons of the Satyam scandal
In reaction to the scandal, the Indian government introduced the Companies Bill
2009 to address corporate governance, among other issues. The Bill added several
criteria to the appointment requirements for an independent director. In the month
following the scandal, resignations by independent directors rose to 109 from the
average of 30.
If the government took such decisions it is because, it tries to reduce to the
minimum the number of scams. In the Indian context, the need for corporate
governance has been highlighted because of the scams occurring frequently since
the emergence of the concept of liberalization from 1991. However, CII advocates
caution against overregulating. The structure of corporate governance is built on
laws and regulations; these cannot be anything more than a basic framework. In
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Corporate governance in India:
Satyam case
corporate governance it is a voluntary choice of companies taking conscious
decisions of going beyond the mere letter of law.
The aim of this report is to is to encourage better practices through voluntary
adoption, based on a firm conviction that good corporate governance not only comes
from within but also generates significantly greater reputational and stakeholder
value when perceived to go beyond the rubric of law.
In addition, numbers of other corporate groups have joined the corporate
governance dialogue. Among them, the National Association of Software and
Services Companies (NASSCOM), which has formed a Corporate Governance and
Ethics Committee.
In September 2009, the SEBI Committee on Disclosure and Accounting Standards
published a discussion paper seeking public comment on several governance issues.
The committee’s paper addressed proposed reforms directed, among other matters,
to the role and function of the audit committee and of external auditors, including
the appointment of the chief executive officer (CEO) by the audit committee and the
rotation of audit partners every five years.
The MCA has increasingly supplanted SEBI in reform efforts following the Satyam
scandal. The MCA Guidelines included independence of the boards of directors,
responsibilities of the board, the audit committee, auditors, secretarial audits, and
mechanisms to encourage and protect whistle-blowing. Important provisions
include: (i) issuance of a formal appointment letter to directors; (ii) Separation of the
office of chairman and the CEO; (iii) institution of a nomination committee for
selection of directors; (iv) limiting the number of companies in which an individual
can become a director; (v) tenure of directors; (vi) remuneration of directors; (vii)
training of directors; (viii) performance evaluation of directors; and (ix) additional
provisions for statutory auditors.
However, the MCA Guidelines remains incomplete since the guidelines do not
provide for additional mechanisms such as cumulative voting for election of
independent directors or approval of related party transactions by a committee
consisting only of independent directors or by independent shareholders.
The MCA Guidelines plays a significant role in corporate governance debate in India.
It breaks with prior corporate governance reforms in India. For the past ten years,
corporate governance norms in India have been a mandatory requirement for large
listed companies through Clause 49. The MCA Guidelines have been described as
following the “comply-or-explain” approach followed in the United Kingdom.
However, even if corporate governance is frame by an amount of rules, regulations
and guidelines and laws, it must come from within, it has to be voluntary, to come
from the top and must be applied to the entire organization. The best approach to
corporate governance would combine mandatory rules (minimums) with flexible
voluntary guidelines.
Additionally, shareholders should ensure that the composition of Board of Directors
is a balanced mix of independent directors and management appointees. This would
help keep a check on the internal processes of the company.
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