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CORPORATE GOVERNANCE: THE CONTEMPORARY SCENARIO

Chapter · September 2009

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 a
CORPORATE GOVERNANCE:
THE CONTEMPORARY SCENARIO

ABSTRACT
“Corporate Governance (CG)” has always been and, in fact, is likely to remain a
conscientious issue for corporateurs across the globe. Some view CG as a bunch of
regulatory provisions that find their way into the statute book creating impediments to
and restricting flexibility in company operations while the more pragmatic consider CG
as an immensely desirable (and largely self imposed) mechanism that facilitates
corporate processes by motivating executives to respect the rights and interests of
stakeholders and simultaneously making the said stakeholders accountable for the
protection and distribution of corporate resources and earnings in the best interests of all.
However, we may well differ on the definition and scope of CG but the fact remains that
the Satyam fiasco that occurred, as it did, on the heels of the global financial crisis
(meltdown) has left one and all wondering about what went wrong. Needless to say,
implementation of good CG practices would perhaps, have contributed to the saving of
the destruction of millions of dollars of shareholder wealth, the loss of hundreds of jobs
and criminal actions against many. It is in this backdrop that we propose to review the
existing status of CG in our country highlighting our standing in relation to the United
States and Britain. After elucidating salient CG practices in these countries, we shall
examine their relative implications, analyze their mutual compatibility and also look at
the various impediments to global harmonization of provisions relating to CG.

Keywords: Corporate Governance, Financial Meltdown, Global Harmonization of CG

Practices.

I. Introduction

The concept of a “corporate” is, at least two centuries to the good and so is that of
“corporate governance” albeit in a latent form. The much celebrated “Salomon vs
Salomon & Co., [1897], AC 22, House of Lords” bears testimony to this. However, the
near total dominance of materialism over munificence in the present age with the
consequential desperation to earn “easy money” at all costs has led to numerous massive
a
J. P. Singh
Professor
Department of Management Studies
Indian Institute of Technology Roorkee, Roorkee 247667, Uttarakhand, jatinfdm@iitr.ernet.in,
jpsiitr@gmail.com

b
Naveen Kumar
Research Scholar
Department of Management Studies
Indian Institute of Technology Roorkee, Roorkee 247667, Uttarakhand
navksddm@iitr.ernet.in
corporate disasters perpetrated by our insatiable greed for mundane pleasures and the
desire to quench our inflated egos through wealth amassment. In this backdrop,
corporate governance is emerging from a set of self imposed ethical restraints into a
structured corporate code with statutory enforceability. An article of this nature would
be incomplete without a brief tracing of the corporate governance timeline, which would
put the contents to follow in perspective. In the context, we shall, for the sake of brevity,
confine ourselves to the developments in the United States, the United Kingdom & India
in this regard.

Commensurate with its enviable position as the most sensitized economy in the world,
the United States has seen the fastest evolution of corporate culture. By the end of the
Wall Street crash of 1929 and the accompanying Great Depression (1929-1932) most
US corporates were having widely dispersed shareholdings distributed among millions
of middle class investors. Obviously, with such a shareholding profile, concerted action
on the part of shareholders was extremely rare. Commercial operations were entrusted to
professional managers designated “Chief Executive Officers” under the supervision of a
small nominated body, the Board of Directors (Chandler 1990). Instances of abuse of
power by CEOs, sometimes in collusion with the Board members were not occasional
and those of manipulation of information provided to owners were also getting frequent
(e.g. the Watergate scandal, 1970, the Enron & Worldcom scandals, 2002) warranting
concrete action by the country’s administration to restore investor confidence (Naidoo,
2002). The US Government responded by the enactment of the Sarbanes Oxley (SOX)
Act in 2002 that was adopted by the New York Stock Exchange immediately thereafter.
The said enactment introduced, for the first time, provisions for criminal action against
corporate directors & officers for providing misleading information to the company’s
auditors. It also provided for certification of the company’s quarterly & annual reports
by the CEOs & CFOs for companies that were registered with the Securities Exchange
Commission (SEC). The company’s management was required to provide details of the
internal controls and its assessment of the efficacy thereof in the annual reports with the
auditors being mandated to give their comments thereon. The SOX also provided for
fine as well as imprisonment for breach of the provisions of the Act as well as the rules
made by the SEC, NYSE & NASDAQ under the rule making power conferred by the
said enactment (Sarbanes-Oxley Act, New York Stock Exchange Listed Company
Manual, NASDAQ Stock Market Rules), (Allen & Englander, 2007).

In contrast to the United States, the corporate governance framework in the United
Kingdom & India had a piecemeal evolution. The contemporary corporate governance
framework in the UK has its genesis in the Cadbury Committee (1992), Greenbury
Committee (1995), the Hample Committee (1998), the Turnbull Committee (1999) and
the Higgs Committee (2003). Inputs from all these Committees have culminated in the
creation of the “Combined Code of Corporate Governance” that is supplemented by the
Turnbull Guidance (on internal control requirements of the code), the Smith Guidance
(on audit committees & auditors) and the Higgs Review (on good practices). While the
provisions of the Combined Code are not mandatory, based on the “comply or explain”
principle (i.e. corporates not complying with the code are required to give reasons for
not doing so), the corporate governance framework in the UK is strengthened by various
common law doctrines, the Companies Act, 1985, provisions of the Memorandum &
Articles of Association of the company & the listing rules.
Although the corporate culture in India is of relatively recent origin, corporate
governance practices were inducted into the statute book for the first time via the Indian
Companies Act, 1913 that was later upgraded to the Companies Act, 1956 with several
subsequent minor amendments. Concurrently with the Companies Act, 1956, the
Securities Contracts (Regulation) Act, 1956 provided a smooth mechanism for the
regulation of trading in the securities market. A comprehensive overhaul of the financial
sector regulatory structure was executed in the 1990s with a view to making it
compatible with the liberalization/globalization program of the Government. The office
of the Controller of Capital Issues was abolished with the induction of the free market
pricing regime for security issues. Simultaneously therewith, an autonomous Board
christened “The Securities & Exchange Board of India (SEBI)” was formulated pursuant
to the enactment of the SEBI Act with the objective of establishing a single window
overseeing mechanism for all aspects of securities markets operations. The
establishment of a formal corporate governance framework in India received a huge
fillip when SEBI constituted the Kumaramangalam Birla Committee on May 7, 1999 to
advise on the formulation of corporate governance standards for publicly listed
companies. The immediate fallout of the recommendations of the said Committee was
the incorporation of Clause 49 in the Standard Listing Agreement providing for norms in
relation to the Board of Directors and internal control mechanisms of publicly listed
companies. Significant milestones in the road to the induction of a formal corporate
governance structure in India are tabulated below (Afra Afasaripour, 2009), (Ananya
Mukherjee Reed, 2002):

Milestone Year Details & Remarks

Desirable Corporate 1998 The CII Code, a voluntary corporate governance
Governance: A Code code, emanated from the recommendations of the
(CII Code, 1998) task force set up by the Confederation of Indian
Industry (CII) in 1996. The said code, based on the
Anglo-American system of corporate governance,
contained detailed governance provisions for listed
companies. However, being voluntary in its
implementation, it did not prove to be as effacious
as envisaged.
Kumaramangalam 1999 As mentioned above, the Kumaramangalam Birla
Birla Committee Committee was constituted by SEBI on April 7,
(Birla Report, 1999) 1999 to recommend on the introduction of a
mandatory corporate governance code. The Birla
Committee’s recommendations were again, on the
lines of the US corporate governance framework,
providing for statutory directives relating to the
structure and functioning of corporate Boards (with
emphatic provisions on the induction of
“independent” directors on the boards, as also the
criterion by which such “independence” needs to be
assessed) and disclosures to shareholders – it
suggested the incorporation of a separate section in
the corporate annual reports comprising of
“Management Discussion & Analysis” as well as
the constitution of a Committee under the

Clause 49 of the 2000
Listing Agreement
(Black & Khanna,
2007), (SEBI, 2000)
Chandra Committee 2002
(Chandra Report,
2002)
Murthy Committee 2002
(Murthy Report, 2003)
Chairmanship of a non-executive director to look
into shareholders’ grievances received by the
company.
Recommendations of the Birla Committee soon saw
the light of day with SEBI responding by amending
the Listing Agreement, incorporating therein Clause
49 in less than five months. This clause constitutes
the first formal statutory milestone in Indian
corporate governance.
Sequel to the enactment of the SOX Act in the US,
Government of India, Department of Company
Affairs constituted a Committee under the
Chairmanship of Shri Naresh Chandra to look into
the reformation of the Companies Act, 1956 with a
view to strengthening the corporate governance
provisions in the said Act. The said Committee
made several recommendations primarily aimed at
streamlining the provisions of the Act relating to
auditors & auditing. It also addressed certain issues
of disclosures in communications between the
company and its members. However,
recommendations of the Chandra Committee never
found their way into the statute book (Sucheta
Dalal, 2003).
With the relations between the Department of
Company Affairs, Government of India & the SEBI
being far from harmonious and each one believing
that corporate governance was its exclusive domain
(DCA through Parliamentary legislation via the
Companies Act, 1956 and SEBI through the Listing
Agreements), SEBI responded to the constitution of
the Chandra Committee by DCA by forming a
parallel Committee under the Chairmanship of Shri
N R Narayanamurthy with terms of reference
substantially overlapping with the Chandra
Committee in 2002. The Murthy Committee was
constituted, ostensibly in the backdrop of the Enron
& Worldcom scandals in the US in that year, to
advise on the adequacy and efficacy of the
provisions of Clause 49 of the Listing Agreement
and to suggest measures for the improvement of the
prevalent corporate governance practices with a
view to “enhancing the transparency and integrity
of the Indian stock markets”. It was also directed to
recommend measures so that Indian corporates
adhered to the corporate governances, not merely in
letter but also in spirit.
The Murthy Committee submitted its report on
February 8, 2003. Some of its recommendations

Clause 49 of the 2003
Listing Agreement (as
amended) (SEBI 2003)
Irani Committee 2004
The Companies Bill, 2009
2009 Companies Bill,
2009)
were radical with far reaching ramifications. The
prominent ones include (a) the strengthening of the
definition of “independence” in context of Board
members; (b) “nominee directors” i.e. directors
nominated by financiers in pursuance of loan
agreements be not considered as “independent
directors” and be subject to the same
responsibilities & liabilities as normal directors; (c)
enhancing and redefining the constitution and role
of “audit committees”; (d) protection of whistle
blowers etc.
As in the case of the Birla Committee, the Murthy
Committee recommendations also found rapid
entrée into the corporate governance code through
the amendment of Clause 49 of the Listing
Agreement. In particular, the upgraded provisions
in relation to the corporate boards, audit
committees, transparency, disclosures and
certifications as advocated by the Murthy
Committee were assimilated in Clause 49.
Sequel to the implementation of the views of the
Murthy Committee through amendments in Clause
49 of the Listing Agreement, the DCA constituted
another Committee in December 2004 under the
Chairmanship of Shri J J Irani to make its presence
felt. The mandate to the Committee was to revamp
and reorganize the Companies Act, 1956 with a
view to incorporating therein the internationally
acknowledged best practices in this regard. The
Irani Committee came up with several
recommendations that were in conflict with the
extant Clause 49 of the Listing Agreement and/or
the views of the Murthy Committee e.g. (a)
providing for several exemptions based on size and
extent of public ownership in a mandatory
corporate governance framework so as to optimize
compliance costs while maintaining a desired level
of regulatory rigour; (b) the criteria for
“independence” of “independent directors” is
proposed to be weakened significantly; (c) the
mandatory requirement of independent directors to
constitute one-half of the Board be weakened to
one-third of the total members of the Board (d)
abolition of age limits for independent directors that
were prescribed by the Murthy Committee (Irani
Committee, 2005).
The Irani Committee submitted its report on May
31, 2005. Concurrently, the DCA had introduced a
'Concept Paper on new Company Law' through its
 website on 4th August, 2004 inviting comments
from various sections of the society. In conjunction
with inputs received from the Expert Committee &
several other sources that included the Ministry of
Law, the DCA set about the task of a
comprehensive revamping of the Companies Act,
1956. The efforts culminated in the introduction of
the Companies Bill, 2008 in the Lok Sabha on
October 23, 2008 in the 14th Lok Sabha. The bill
was subsequently referred to the appropriate
Parliamentary Standing Committee on Finance for
examination and report. Before the said Committee
could present its report, 14th Lok Sabha was
dissolved and the Companies Bill, 2008 lapsed
under the provisions of clause (5) of Article 107 of
the Constitution of India. In view of this, the
Companies Bill, 2009 has been introduced in
Parliament on August 3, 2009.

II. Salient Provisions of the Contemporary Corporate Governance Code in US, UK

& India

We, now, briefly, elucidate the salient provisions of the Corporate Governance Code in
the United States, United Kingdom & India as it stands of today, the objective being
precisely to facilitate continuity and completeness of this article (Adam Dowdney,
2005). Details of provisions are available on the respective websites and are listed in the
“References” for convenience.

(A) The United States

As mentioned in the preceding section, the contemporary corporate governance code in

the United States emanates from the provisions of the Sarbanes & Oxley (SOX) Act of
2002 and the rules and regulations made by the SEC, NYSE & NASDAQ under the
provisions thereof. Some of the salient features of the SOX are summarized below. It is
opportune to reiterate that the US corporate governance framework vests on the
mandatory adherence principle unlike the United Kingdom where corporate governance
emerges with the philosophy of “comply or explain”.

(1) Constitution of the Public Company Accounting Oversight Board (PCAOB) with
the cardinal functions of registration of all auditors of companies subject to the
US securities laws and the overseeing of the audit of public companies subject to
such laws;

(2) Provisions relating to independence of external auditors including inter alia (a)
rotation of audit partners; (b) restrictions on the non-audit services that may be
provided by external auditors etc.;

(3) Provisions relating to the constitution, role and independence of audit

committees, their responsibilities, duties & liabilities;
(4) Certification of quarterly & annual reports to shareholders by the CEOs & CFOs;

(5) Provisions relating to prohibition of insider trading;

(6) Provisions relating to initiation of pecuniary action and/or criminal action for
non-compliance/defaults & false certifications;

(7) Stringent provisions relating to transparency and disclosure of information to

shareholders e.g. of the existence and efficacy of internal control mechanisms
with comments thereon by the external auditors, off balance-sheet transactions
etc.

(8) Prohibition of loans to directors & other executive officers of public companies;

(9) Provision for the review and examination of the annual reports of registered
companies by the SEC every three years;

(10) Mandatory real-time disclosures of material events affecting the financial status
& operations of public companies.

(B) The United Kingdom

The provisions relating to corporate governance in the United Kingdom are relatively
unstructured and take the form of a Combined Code on Corporate Governance
augmented by judicial pronouncements and doctrines expounded by the Courts under
Common Law & the Companies Act of 1985. The Combined Code is, however, not
mandatory although listed companies are required either to comply therewith or
otherwise to include a statement in their annual reports justifying non-compliance.
Important provisions of the UK corporate governance environment include:

(1) Provision for the investigation of the accounts and affairs of companies whose
accounts seem flawed and inconsistent by the Financial Accounting Reporting
Review Panel;

(2) Provisions empowering the Secretary of State to demand detailed disclosure by

listed companies of audit and non-audit services provided by auditors;

(3) Provisions relating to the independence and the role and responsibilities of audit
committees;

(4) Provision for criminal action against erring directors who make false statements
in the Directors’ Report insofar as there being “no relevant audit information”
that they know and which the auditors are unaware of;

(5) The Combined Code, although not providing for certification of the existence
and efficacy of internal controls, does expect assurances on internal controls as a
matter of best practices;
(6) Provisions exist under the Companies Directors Disqualification Act, 1986 for
debarring directors holding office as such under certain circumstances;

(7) Provisions exist for restricting loans to Directors and related persons, although
executives are not covered by the prohibition;

(8) The Criminal Justice Act of 1993 contains penal provisions in relation to insider
trading;

(9) The UK Listing Agreement embodies stringent provisions for the disclosure of
off-balance sheet items for fully listed companies;

(10) Just like the US provision, the Listing Agreement mandates immediate
disclosure of material occurrences that affect the financial position or operations
of fully listed companies.

(C) India

With the Companies Bill of 2009 still awaiting the Parliamentary & Presidential nod, as
of now, corporate governance provisions are encapsulated in Clause 49 of the Listing
Agreement read with the provisions of the Companies Act of 1956. Cardinal stipulations
of Clause 49 referred above include:

(1) Insofar as the Board of Directors of public listed companies are concerned, the
following are mandated in Clause 49:

(ai) Companies having an executive director as Chairman must necessarily

have half of the Board comprising of independent directors;
(aii) In other cases, the Board shall have at least one third independent
directors;

(b) The criterion for “independence” includes (i) no pecuniary relationship or

transactions with the company, its promoters, management &
subsidiaries; (ii) no relationship with any of the Board members or with
executives holding positions one level below the Board; (iii) no
relationship with the company for at least the preceding three years.
Directors nominated to the Board in pursuance of loan agreements by
financial institutions shall be considered “independent”;

(c) Companies to prescribe a Code of Conduct for Directors;

(2) With regard to “audit committees”, the following are prescribed in Clause 49:

(a) “Audit Committees” shall consist of at least three directors, all of whom
shall be financially literate with at least one of them having accounting or
financial experience;
 (b) At least two-thirds of the directors on the audit committee should be
independent directors, one of whom shall be the Chairman of the
Committee;

(c) The audit committee shall meet at least four times in a year and shall
have the responsibilities of (i) reviewing the statutory and internal
auditors and the internal audit function; (ii) supervising the company’s
financial reporting process, disclosures of financial information etc.

(c) The audit committee shall enjoy the powers of (i) investigating any
activity that falls within its domain; (ii) seeking information from the
employees of the company; (iii) seeking outside legal and professional
advice as it may deem necessary etc.

(3) Clause 49 also mandates the following disclosure requirements for listed
companies:

(a) Related party transactions;

(b) Accounting policies and any departures from standards;
(c) Directors’ Remuneration and other forms of compensation;
(d) Instances of non-compliances for the preceding three years;
(e) The company’s annual report to include a special chapter “Management
Discussions & Analysis” that would explain the management’s
perspective in relation to industry structure & developments, future
outlook for the business, opportunities and threats, existence and
adequacy of internal control systems, segment & product wise
performance etc.;
(f) Details of provisions of corporate governance that have been adopted by
the company and explicit information on the non-compliance with any
mandatory requirements and the justification therefor;
(g) Disclosure of the brief profile, areas of expertise and other directorships
in respect of each candidate who is proposed to be inducted as a director;

(4) Financial statements, effectiveness of internal controls, legal transactions must

be certified by the CEOs & CFOs who shall also inform the audit committee of
any significant changes therein;

(5) Compliance with corporate governance mandates shall also be certified by the
Company Secretary or the company’s auditor.

It needs be emphasized here that the provisions of the Listing Agreement are mandatory
only for companies whose securities are listed on one or more stock exchanges in India,
a prerequisite whereof is the signing of the Listing Agreement. Nevertheless, the
Companies Act, 1956 (http://indiacode.nic.in/fullact1.asp?tfnm=195601) also contains
several provisions relating to corporate governance, the notable ones being in relation to
the form & contents of the prospectus (Sections 55-61, 64-67) and penalties (including
criminal prosecution) for misleading statements made therein (Sections 62-63, 68), form
and content of the Annual Accounts & Returns (Sections 159-162, 209-216, 218-223),
audit & auditors (Sections 224 -233B), Directors’ Report (Section 217), provisions
relating to the notice, agenda, time and place of various meetings (e.g. statutory meeting,
annual general meeting, extraordinary general meeting, meetings of directors, meeting
of creditors etc.) (Sections 165-197, 285-290), provisions relating to appointment of
directors, (Sections 252-255, 257-260, 262, 265-266), their retirement by rotation
(Section 256), their disqualifications (Section 274, 283-284), their transactions with the
company (Sections 299-302), provisions relating to shareholder sponsored investigation
into the affairs of the company by Government agencies (Sections 235-247), provisions
for the prevention of oppression & mismanagement (Sections 397-409) etc.

III. A Comparative Evaluation & Issues in Harmonization

A perusal of the provisions of the SOX Act of the US and the rules made thereunder by
the SEC, NYSE & NASDAQ, the Combined Code on Corporate Governance of the UK
and Clause 49 of the Listing Agreement of India reveals a very obvious fact – that the
Indian corporate governance structure owes its entire genesis to the Anglo-American
Model of corporate governance. The American, British as well as Indian corporate
governance is administered through the four organs viz. the Board of Directors, Audit
Committees, Disclosures & Certifications and the provisions in this regard are so
similar that differences therein are reduced to near-trivialities i.e. in matter of detail,
most of which can be inferred from the preceding section.

However, this is not to say that India has achieved anywhere near optimal level of
corporate governance or has entered the echelons of governance equivalent to the
developed world. The problem lies not in the creation of a formal governance structure
(which has substantially been achieved, as narrated above) but elsewhere – in the
absence of both, a will to enforce the formal structure as well as the way to enforce the
same i.e. the absence of a tangible and empowered machinery to mandate the
enforcement of the formal code. These candid observations are corroborated by figures
that are truly astounding and make really fascinating reading. To form a perspective of
the figures, we need appreciate the following timeline:

Event Date
Clause 49 introduced for the first time in the listing agreement sequel to March 31,
the Birla Committee Report, Compliance mandated from all companies 2001
constituting the BSE 200 Index and all companies to be listed thereafter
Compliance requirement extended to cover all listed companies with a March 31,
paid up capital of Rs 10 crores or more or a net worth of Rs 25 crores or 2002
more
Compliance requirement further extended to cover companies with a paid
March 31,
up capital of Rs 3 crores or more 2003
Amendments to Clause 49 sequel to the Murthy Committee report August 26,
2003
Deadline for compliance with the amended Clause 49 for all companies March 31,
that were required to comply with the original listing agreement 2004
Deadline extended for compliance as above January 1,
2006

Against this backdrop, only 1789 companies had shown compliance out of 4143
companies listed with the BSE and required to meet compliance with Clause 49 as of
January 2007 while in March 2008, the number of non-complying companies stood at
1213 ( approx 30 %). It is pertinent to mention here that a significant proportion of
defaulting companies are either PSUs or belong to the rung of smaller private companies
– most of the large private companies having achieved the compliance norms (BSE,
2007), (Financial Express, 2007), (Business Line, 2007) & (CFDS).

At this point it is interesting to review the formal enforcement machinery relating to

non-compliance with Clause 49. It is obvious that enforceability of the provisions of
Clause 49 through the judicial system by private action by affected investors is, literally
speaking, out of question with the kind of gestation required for obtaining a Court
verdict (may often exceed a decade). This leaves us with SEBI being the only watchdog
albeit without canines. Under the provisions of the listing agreement, non-compliance
with the provisions thereof could attract delisting of the company’s securities from the
concerned exchange - an action that would cause more detriment to the investors that the
defaulting corporate. Realizing this, financial penalties were introduced for default in
compliance on the concerned company and its directors by legislating Sec 23E in the
Securities Contracts (Regulation) Act, 1956 through the Securities Laws (Amendment)
Act 2004. Let us, now, turn to enforcement actions. SEBI initiated its first enforcement
action in September 2007 and the total number of prosecutions for non-compliance with
Clause 49 as on September 12, 2007 was a mere twenty, including five PSUs (Hindu
Business Line, 2007). However, the silver lining here is that SEBI has taken recourse to
block IPOs of companies that do not validate compliance with Clause 49. There are
several reasons for this pathetic compliance-enforcement conundrum (Afra Afasaripour,
2009).

(1) To understand the dynamics of the compliance-enforcement quandary, we need

to further examine the overall pattern of compliance as espoused by the statistics
thereof. It has been reported that the major chunk of compliance comes from the
top notch private sector companies (with only about 11% of top 204 BSE listed
companies being non-compliant as of March 2007) while the significant
contributors to the set of defaulters consisted of the PSUs and small privately
held companies. There is a strong rationale behind this statistical pattern and it is
not hard to find. The rush for compliance seen in the top level private corporates
is attributed to the “intrinsic desire to comply” that emanates from (a) such large
business houses viewing “compliance” as a value creating mechanism. There is
little doubt that compliance with corporate governance provisions e.g. clause 49
creates a favorable investor perception that translates into enhanced shareholder
wealth; and (b) there being the added incentive that such compliance would be
viewed with favor by foreign investors thereby opening up an attractive avenue
for funds mobilization.

On the other hand, such incentives carry little meaning for PSUs, that are
bounded by stringent Government policies and companies belonging to the
smaller rung that have little chance of competing for foreign investments. In the
case of PSUs the source of disharmony is as to the “independence” of the
government nominees on the Board – SEBI views such nominees as not meeting
the criterion of “independence” whereas the PSUs argue otherwise. As an
alternative, PSUs desire that the number of independent directors mandated on
the Board be restricted to one third rather than one half as stipulated by Clause
 49 (Financial Express, 2006). In the case of smaller companies in the private
sector, compliance is viewed more as a nuisance that necessity. Such companies
usually have their origin in closed family held businesses that have attained
corporate existence to achieve compatibility with the expanding dimensions of
operations. However, a major content of shareholding still vests with the
promoters and such promoters continue to call all the shots. Tangible
shareholder activism is near non-existent. This, coupled with the time and torture
involved in obtaining judicial mandates, means that there exists little scope for
coercive enforcements of corporate governance provisions through private
action. The limitations of the institutional enforcement mechanism are being
alluded to in the sequel.

(2) Ever since the establishment of SEBI and particularly so in the late 1990s, the
Ministry of Company Affairs, Government of India (MCA) and SEBI are
engaged in a turf war insofar as to whose domain encompasses the execution of
corporate governance reforms and this “absence of congeniality” in their mutual
relationship has never escaped the public eye. With each lead taken by SEBI for
the creation of a corporate governance framework, the MCA has responded by a
counter punch e.g. the Chandra Committee in response to the Birla Committee
& the Irani Committee sequel to the Murthy Committee. While most of the
efforts of the MCA in this direction have failed to see the light of day till date,
the explicit tussle between these two top notch organs of the country’s executive
responsible for administering the law of corporate governance has contributed
handsomely to the fickle compliance-enforcement statistics.. On the one hand,
recommendations of the Committees constituted by the MCA contrary to the
provisions of Clause 49 have resulted a psychological dilution of the impact of
Clause 49 and, on the other, have also weakened the stand of SEBI insofar as
enforcement of Clause 49 goes. This is well testified by the attitude of the PSUs
who have continued to resist SEBI’s endeavors for induction of appropriate
number of independent directors on their boards. As a fallout of all this, an
environment subsists where corporates have found it easy to wriggle out of the
mesh of Clause 49. Recognizing, however, that the contentions of MCA as to the
administration of corporate governance reforms through appropriate legislation is
not without substance, the Government has introduced a revamped Companies
Bill, 2009 in Parliament on August 3, 2009 that, if adopted by the legislature,
may readdress the administrative & enforceability aspects of corporate
governance. In testimony to this, the following extract from the “Objects &
Reasons” of the Companies Bill, 2009 is cited:

Clause 4: “………… In addition, there is also a need to avoid overlapping

and conflicts of jurisdiction in the area of sectoral regulations. Therefore
piecemeal re-engineering of the corporate regulatory framework was not
considered adequate to enable the systemic changes required. Hence, a
comprehensive review of the Companies Act, 1956, and introduction of a revised
statutory framework in the form of a new Companies Bill has been considered
essential to achieve the desired reform.”

Clause 5: “……….Broadly the objective of the review was to:-……….…

 (iv) establish a climate that encourages setting up of businesses and their
growth while enabling measures to protect the interests of stakeholders and
investors, including small investors, through legal basis for sound corporate
governance practices and effective enforcement;”

IV Conclusion - The Satyam Fiasco & Corporate Governance

“Corporate Governance” has always been and, in fact, is likely to remain a conscientious
issue for corporateurs across the globe. Some view corporate governance as a bunch of
regulatory provisions that find their way into the statute book creating impediments to
and restricting flexibility in company operations while the more pragmatic consider
corporate governance as an immensely desirable (and largely self imposed) mechanism
that facilitates corporate processes by motivating executives to respect the rights and
interests of stakeholders and simultaneously making the said stakeholders accountable
for the protection and distribution of corporate resources and earnings in the best
interests of all. However, we may well differ on the definition and scope of corporate
governance but the fact remains that the Satyam fiasco that occurred, as it did, on the
heels of the global financial crisis (meltdown) has left one and all wondering about what
went wrong. Needless to say, implementation of good corporate governance practices
would perhaps, have contributed to the saving of the destruction of millions of dollars of
shareholder wealth, the loss of hundreds of jobs and criminal actions against many.

In the above backdrop, let us, very briefly, retrace the chain of events at Satyam. It was
on December 16, 2008, that the Satyam board cleared an investment running into $ 1.60
billion in Maytas Properties & Maytas Infrastructure, companies engaged in real estate
business & development & promoted by the family members of Satyam’s CEO, B
Ramalinga Raju. Fortunately, in retrospection of what transpired subsequently, this
decision created a global adverse reaction and the company’s stock plummeted on the
US exchanges, NYSE & NASDAQ. This created panic at the company’s headquarters
and the proposed investment was called off at a reconvened meeting of the Board on the
same day (Amit Garg, 2008). The next two days were, perhaps, the most traumatic 48
hours of Raju’s life. Four directors on the Board that included the non-executive director
Krishna Palepu and three independent directors Mangalam Srinivasan, Vinod Dham &
M Rammohan Rao, all men of eminence, tendered their resignation. The last ditch effort
of saving Satyam through fictitious asset inductions from Matyas had boomeranged on
Raju and the corporate demise of Satyam was inevitable and imminent. Raju had
exhausted all his options and had none left. On January 7, 2009, Raju, while tendering
his resignation, made the candid confession of having overstated revenues and inflated
profits to the extent of $ 1 billion. The figures admitted by Raju are staggering, and are
reflected in the following extract from his letter of January 7, 2009 to the Board of
Directors of Satyam:-

“1. The Balance Sheet carries as of September 30, 2008

o Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as

against Rs. 5361 crore reflected in the books)
o An accrued interest of Rs. 376 crore which is non-existent
o An understated liability of Rs. 1,230 crore on account of funds arranged
by me
 o An over stated debtors position of Rs. 490 crore (as against Rs. 2651
[cr.] reflected in the books)

2. For the September quarter (02) we reported a revenue of Rs.2,700 crore and an
operating margin of Rs. 649 crore (24% Of revenues) as against the actual
revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3%
of revenues). This has resulted in artificial, cash and bank balances going up by
Rs. 588 crore in Q2 alone.

The gap in the Balance Sheet has arisen purely on account of inflated profits over a
period of last several years (limited only to Satyam standalone, books of subsidiaries
reflecting true performance). What started as a marginal gap between actual operating
profit and the one reflected in the books of accounts continued to grow over the years. It
has attained unmanageable proportions as the size of company operations grew
significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter,
2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the
one reflected in the books was further accentuated by the fact that the company had to
carry additional resources and assets to justify higher level of operations — thereby
significantly increasing the costs.”

Raju’s resignation was immediately followed by that of Satyam’s (or rather Raju’s)
CFO, Srinivas Vadlamani. Raju and his brother, Ramu, were arrested on January 9,
2009. Satyam’s Board was disbanded by the Government of India acting through the
Company Law Board, an interim Board was appointed in proceedings over January
9/10/11, 2009 and an investigation into the affairs was initiated by SEBI. Committed
efforts by the interim Board to find an appropriate suitor bore fruit and the deck was
cleared for the takeover of Satyam by Tech Mahindra in April 2009.

Needless to say, the Satyam fiasco has opened up a Pandora’s Box for the country’s
administration (e.g. Asish Bhattacharyya, 2009, C P Chandrasekhar, 2009, Economic
Times, 2009). Satyam happened to be India’s fourth largest IT major with stocks listed
globally and such events could have only one way repercussions for the nation at a time
when the country is fervently trying to vie with China as the largest imbiber of foreign
direct investments. The episode has espoused the vulnerability of the four pronged
model of administering corporate governance (board, audit committee, disclosures &
certification) in the Indian environment.

The Indian legislature shall have an excellent opportunity to debate on issues of

corporate governance, as indeed the entire corporate legislation, with the placing of the
Companies Bill, 2009 in Parliament on August 3, 2009 – there could hardly have been a
more opportune moment to introduce the Bill. Undoubtedly, a holistic approach needs to
be taken towards corporate governance and the complete revamping of the 1956
Companies Act through the 2009 Bill would be the ideal opportunity. In particular,
issues that must necessarily be addressed forthwith include mechanisms for ensuring the
“independence” of the so-called independent directors & members of audit committees.

The authors have a strong belief in the maxim “perfection can be strived for, but never
attained”. Even the genius in Einstein failed to unmask “a theory of everything” that
continues to defy physicists till date. Almost all mathematics adopts “infinitesimals” and
“infinities” for completeness, concepts that lend to total abstraction. Added to this is the
enigmatism of the human mind and one realizes why it (the maxim) holds. As thorough
a system one may succeed in evolving, there will always be some Prof Moriarity of
Sherlock Holmes fame (“The Final Problem” in “The Adventures of Sherlock Holmes”
by Sir Arthur Conan Doyle) to puncture it and identify means of circumventing its
provisions – this is the way of life. The extant Companies Act of India consists of no
less than 658 Sections & 15 Schedules and yet corporate scams abound (Harshad Mehta,
UTI, Ketan Parekh and, now, to cap it all, Satyam). The Indian Income Tax Act, 1961 is
equally voluminous and yet, again, there is no dearth of tax defaulters. The bottomline is
“good governance needs to emanate from within the soul (if there is one) and not be
imposed upon it”.

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