A.

International Acts: Sarbanes-Oxley Act 2002; OECD

Corporate scandals of various forms have maintained public and political interest in the regulation of
corporate governance. In the U.S., these include scandals surrounding Enron and MCI Inc. (formerly
WorldCom). Their demise led to the enactment of the Sarbanes-Oxley Act in 2002, a U.S. federal
law intended to improve corporate governance in the United States.

The U.S. Congress passed the Sarbanes-Oxley Act of 2002 on July 30 of that year to help protect investors
from fraudulent financial reporting by corporations. Also known as the SOX Act of 2002 and the Corporate
Responsibility Act of 2002, it mandated strict reforms to existing securities regulations and imposed tough
new penalties on lawbreakers.

The act took its name from its two sponsors—Sen. Paul S. Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-
Ohio).

The rules and enforcement policies outlined in the Sarbanes-Oxley Act of 2002 amended or supplemented
existing laws dealing with security regulation, including the Securities Exchange Act of 1934 and other
laws enforced by the Securities and Exchange Commission (SEC). The new law set out reforms and
additions in four principal areas:

1. Corporate responsibility

2. Increased criminal punishment

3. Accounting regulation

4. New protections

Major Provisions of the Sarbanes-Oxley (SOX) Act of 2002

[Important: Because of the Sarbanes-Oxley Act of 2002, corporate officers who knowingly certify false
financial statements can go to prison.]

Section 302 mandates that senior corporate officers personally certify in writing that the
company's financial statements "comply with SEC disclosure requirements and fairly present in all
material aspects the operations and financial condition of the issuer."

Section 401 Financial statements are published by issuers are required to be accurate and presented in a
manner that does not contain incorrect statements or admit to state material information. Off balance
sheet information included.

Section 404 requires that management and auditors establish internal controls and reporting methods to
ensure the adequacy of those controls.

Section 409 Issuers are required to disclose to the public, on an urgent basis, information on material
changes in their financial condition or operations. Disclosures to be supported by quantitative
information.

Section 802 contains the three rules that affect recordkeeping. The first deals with destruction and
falsification of records. The second strictly defines the retention period for storing records. The third rule
outlines the specific business records that companies need to store, which includes electronic
communications.

Whistle blower protection: SOX protects employees that report fraud and testify in court against their
employers. Companies are not allowed to change the terms and conditions of their employment.

Besides the financial side of a business, such as audits, accuracy and controls, the SOX Act of 2002 also
outlines requirements for information technology (IT) departments regarding electronic records. The act
does not specify a set of business practices in this regard, but instead defines which company records
need to be kept on file and for how long.

OECD Corporate governance principles:

1. Ensuring the basis for an effective corporate governance framework: promote transparent and
efficient markets, be consistent with the rule of law and clearly articulate the division of
responsibilities.
2. The rights of shareholders and key ownership functions: should protect and facilitate exercise of
rights.
3. Institutional investors, stock markets and other intermediaries: Sound economic incentives
throughout the investment chain, with a particular focus on institutional investors acting in a
fiduciary capacity. Need to disclose and minimize conflicts of interest that may compromise the
integrity of brokers, analysts.

4. The role of stakeholders: should recognize the rights of stakeholders established by law or through
mutual agreements and encourage active co-operation between corporations and stakeholders.
5. Disclosure and transparency: 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.
6. The responsibilities of the board: 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.

H: Whistle blower policy, Insider trading, corporate takeovers

Whistle blower policy:

Whistle blower protection act, 2011:

An Act to establish a mechanism to receive complaints relating to disclosure on any allegation of

corruption or willful misuse of power or willful misuse of discretion against any public servant.
To inquire or cause an inquiry into such disclosure.

To provide adequate safeguards against victimization of the person making such complaint.

 The Act seeks to protect whistle blowers, i.e. persons making a public interest disclosure related
to an act of corruption, misuse of power, or criminal offense by a public servant.

 Any public servant or any other person including a non-governmental organization may make such
a disclosure to the Central or State Vigilance Commission.

 Every complaint has to include the identity of the complainant.

 The Vigilance Commission shall not disclose the identity of the complainant except to the head
of the department if he deems it necessary. The Act penalizes any person who has disclosed the
identity of the complainant. Penalty: Imprisonment upto 3 years and fine upto INR 50,000.

 The Act prescribes penalties for knowingly making false complaints. Penalty: Imprisonment upto
2 years and fine upto INR 30,000.

Case:

Satyendra K. Dubey’s murder in 2003 led to demand for such legislation. In a letter addressed to the Prime
Minister, Dubey, a manager in the National Highways Authority of India (NHAI) posted at Gaya, had
highlighted corrupt practices in the NHAI and specifically requested that his identity be kept secret. But
the information was leaked, leading to his murder.

Vigil mechanism under Companies Act, 2013: Sec. 177(9):

1. Every listed company

2. Companies which accept deposits from the public

3. Companies which have borrowed money from banks and public financial institutions in excess of
₹ 50 crs

Prohibition on Insider trading: Sec 195:

No person including any director or KMP of a company shall enter into insider trading in respect of
securities of the company.

Punishment for contravention: Imprisonment up to 5 years or with fine of ₹ 5 lac to ₹ 25 crs or 3 times
the amount of profit made out of insider trading, whichever is higher or with both.

Case:

Rajat Gupta, convicted of insider trading has been fined $13.9 million to settle related civil charges of
feeding inside information to his friend Raj Rajaratnam.
Gupta was sentenced to two years in prison for passing confidential information gained from his position
as a Goldman Sachs director to Raj Rajaratnam, founder of the Galleon group of 14 hedge funds.

Corporate takeovers:

The acquisition of a target company by another company (referred to as the acquirer).

If the acquiring company approaches the company’s board with an offer, it is termed as friendly takeover.

If the acquiring company directly approaches the company’s shareholders, it is termed as hostile takeover.

Hostile takeover strategies:

1. Tender offer: To purchase shares from shareholders of the target co at a premium.

2. Proxy vote: Acquiring co persuades the shareholders to vote out the management of the company.

Defenses against hostile takeover:

 Poison pill: Making the stocks of the target company less attractive by allowing current
shareholders of the target company to purchase new shares at a discount. This will dilute the
equity interest represented by each share and, thus, increase the number of shares the acquirer
company needs to buy in order to obtain a controlling interest.

 Crown jewels defense: Selling the most valuable parts of the company in the event of a hostile
takeover. This obviously makes the target company less attractive and deters a hostile takeover.

 Supermajority amendment: An amendment to the company’s charter requiring a substantial

majority (67%-90%) of the shares to approve a merger.

 Golden parachute: An employment contract that guarantees extensive benefits to key

management if they are removed from the company.

 Greenmail: The target company repurchasing shares that the acquirer has already purchased, at
a higher premium, in order to prevent the shares from being in the hands of the acquirer. For
example, Company A purchases shares of Company B at a premium price of $15; this requires the
target, Company B, to repurchase those shares at a higher premium or face a hostile takeover.

 Pac-Man defense: The target company purchasing shares of the acquiring company and
attempting a takeover of their own.

 White Knight: A strategic partner that merges with the target company to add value and increase
market capitalization. Such a merger can not only deter the raider but can also benefit
shareholders in the short term if the terms are favorable, as well as in the long term if the merger
is a good strategic fit.
Examples:

2019 - L&T trying to takeover Mind tree by purchasing 20.4% stake from founder VG Siddhartha.

In 1983 – Swaraj Paul tried to take control of Escorts Ltd and Delhi Cloth Mills.

In 1988 – India cements made a hostile bid for Rassi cements.

In October 2000, Abhishek Dalmia made an open offer to acquire 45 per cent of share capital in Gesco
Corporation at Rs 23 per share. This transaction entered became a drama of hostile takeover until the
promoters of Gesco and the Dalmia group announced that they had reached an amicable settlement in
the battle for Gesco, with the former buying out Dalmias' 10.5 per cent stake at Rs 54 per share for a total
consideration of Rs 16 crore.