Corporate Governance

Meaning of Corporate Governance

Corporate Governance is a system by which companies are directed and controlled.
The aim of the Corporate Governance is to achieve best interest to all stack holders.
Stake holders are persons who are directly or indirectly connected to the company
It aims to achieve at total transparency, integrity, and accountability among directors while performing their functions
which in turn requires the principles of commitment to values, ethical business conduct and a high degree of feeling
responsibility.
Definition of Corporate Governance
Cadbury committee UK has defined Corporate Governance as follows
It is the system by which companies are directed and controlled
Kumar Mangalam Birla Committee constituted by SEBI observed that strong corporate Governance is indispensable to
resilient and vibrant capital market and is an important instrument of investor protection.
NR, Narayana Murthy committee specified that Corporate Governance is the acceptance by management of the
inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the
shareholders.It is about commitment to values, about ethical business conduct and about making as distinction between
personal and corporate in the management of a company.
 Importance of Corporate Governance
 Corporate Governance is a voluntary ethical code of business of companies
 Corporate Governance is a process of structuring, operating and controlling a ompany with specific aims of
fulfilling its long term strategic goals by encompassing a sound board monitoring system over the
functional and compliance aspects.
 Corporate Governance is not just corporate management ,it is a fair ,efficient and transparent
administration to meet well defined objectives.
Objectives of corporate Governance
Fundamental objective is enhancement of shareholders value keeping in view the interest of other stack holders
> Constitution of properly structured Board which can take independent and objective decisions at the right
point of time
> A balanced composition of Board, which includes adequate number of Non- Executive and independent
Directors, who will look after the wellbeing of all stakeholders
> Adoption of transparent procedures by the board and aobtaining adequate information before arriving at
decisions.
 Effective communication procedures to keep the Shareholders informed about relevant developments
 The overall attempt of the Board should be to take the organization forward to maximize long-term values
and shareholders wealth.
Quality of governance depends on the following Factors
Intigrity of the Management
Ability of the Board
Adequacy of the process
Commitment level of individual board members
Financial Reporting
Quality of corporate Reporting
Salient features of corporate governance
Mandatory Requirements
> Board of Directors
> Audit Committee
> Remuneration Committee
 Shareholders committee
 General Body Meeting
 Disclosures
 Communication
 General share holders information
   
iStock
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 ENRON SCAM
Enron was founded in 1985 by kenneth lay in the merger of two natural-gas-transmission companies,
Houston natural gas corporation and Internorth, The merged company, HNG Inter north, was renamed
Enron in 1986. After the U.S. Congress adopted a series of laws to deregulate the sale of natural gas in the
early 1990s, the company lost its exclusive right to operate its pipelines. With the help of Jeffrey Skilling,
who was initially a consultant and later became the company’s chief operating officer, Enron transformed
itself into a trader of energy derivative contracts, acting as an intermediary between natural-gas producers
and their customers. The trades allowed the producers to mitigate the risk of energy-price fluctuations by
fixing the selling price of their products through a contract negotiated by Enron for a fee. Under skilling’s
leadership, Enron soon dominated the market for natural-gas contracts, and the company started to generate
huge profits on its trades.
Skilling also gradually changed the culture of the company to emphasize aggressive trading. He hired top
candidates from MBA programs around the country and created an intensely competitive environment within
the company, in which the focus was increasingly on closing as many cash-generating trades as possible in
the shortest amount of time. One of his brightest recruits was Andrew Fastow, who quickly rose through the
ranks to become Enron’s chief financial officer. Fastow oversaw the financing of the company through
investments in increasingly complex instruments, while skilling oversaw the building of its vast trading
operation.
 Downfall and bankruptcy
 As the boom years came to an end and as Enron faced increased competition in the energy-
trading business, the company’s profits shrank rapidly. Under pressure from shareholders,
company executives began to rely on dubious accounting practices, including a technique
known as “market-to-market accounting,” to hide the troubles. Market-to-market
accounting allowed the company to write unrealized future gains from some trading
contracts into current income statements, thus giving the illusion of higher current profits.
Furthermore, the troubled operations of the company were transferred to so-called special
purpose entities (SPEs), which are essentially limited partnerships created with outside
parties. Although many companies distributed assets to SPEs, Enron abused the practice by
using SPEs as dump sites for its troubled assets. Transferring those assets to SPEs meant
that they were kept off Enron’s books, making its losses look less severe than they really
were. In February 2001 Skilling took over as Enron’s chief executive officer, while Lay
stayed on as chairman. however, Skilling abruptly resigned, and Lay resumed the CEO
role. By this point Lay had received an anonymous memo from Sherron Watkins, an Enron
vice president who had become worried about the Fastow partnerships and who warned of
possible accounting scandals.
In addition, hundreds of civil suits were filed by shareholders against both Enron and Andersen.
While a number of suits were successful, most investors did not recoup their money, and employees
received only a fraction of their 401(k)s.
The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy
of financial reporting for publicly traded companies. The most important of those measures, the
Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial
records.
 Satyam Scam
Ramalinga Raju formed the IT company Satyam computer limited in 1987 in Hyderabad. The company
began with 20 employees and rapidly grew as a global business. The company offers IT services
spanning various sectors. Satyam computers was listed on the Bombay Stock Exchange in 1991 & it
was listed on the New York Stock Exchange in 2001. Satyam computers became one of the fastest-
growing company of India and hence Ramalinga Raju & Satyam computers won many awards during
its growth years.
Real Estate sector was on a boom at that time & hence Raju started buying the land properties in
Hyderabad and nearby areas. He was in short of funds due to aggressive buying of properties. So he
started manipulating financial statements of Satyam computers to generate more funds. For example, if
the actual profit of Satyam was Rs 60 crores then in financial statements, Raju shows the profit of Rs
600 crores to show that Satyam is growing very rapidly. Share prices of Satyam were growing rapidly
due to this fake growth. Raju opened 365 new companies to buy properties. He made his farmworkers
director of these companies & purchased the properties under their name. Raju thought that the property
rates would grow in multiples after some time then he will sell these properties & fill the gap that he has
created in Satyam’s financial statements. Because of manipulation in the financial statements of Satyam
for years, there is a huge gap between the actual figures & fake figures in financial statements.
Rates of properties decreased drastically due to the recession in 2008, and Raju’s plan of selling
properties at high rates failed. He made a new plan to balance the actual figures & fake figures.
According to his new plan, he will buy two companies that are Maytas properties and Maytas
infra on paper but in reality, there will be no cash transaction. 2008 Satyam’s Board of Directors
approved the founder’s plan, and Raju sanctioned the deal without taking approval of the
shareholders. Investors of Satyam were not happy from this decision, and one U.S investor filed
a lawsuit on Satyam due to which the share prices of Satyam were decreased by almost 55% on
New York Stock Exchange (NYSE).
Satyam’s problems began when its chairman, Mr. Ramalinga Raju, announced a $1.6 billion
offer for two Maytas firms, namely, Maytas infrastructure ltd and Maytas properties ltd, on ,
2008, indicating that he wished to use the capital available for the benefit of investors. Raju’s
family has promoted and controlled the two businesses. Investors and the market both gave him
the thumbs down, forcing him to withdraw within 12 hours. Concerns regarding Satyam’s
corporate governance caused a 55 percent drop in share values of the company. Satyam was
forbidden from doing business with the world bank for eight years 2008, after the international
institute charged it with data theft and corrupting its employees. 
 For many years Satyam accounts showed profits that had never existed, cash at the bank that did not exist,
which inflated the share price. Raju and friends then sold shares.
The accounts also showed $3M of salary payments to people who did not exist. These in fact went to board
members. The falsified accounts were used to obtain cheap loans in the USA which were stolen by Raju and
never entered into the accounts. Much of the money was squandered in real estate deals in Hyderabad. When the
property market collapsed in 2008,
the money vanished and Whistle-Blowers began to be heard. A failed attempt by Raju to use Satyam to buy a
property company led to the scandal being uncovered.
Initial confession and investigation
On 2009, the chairman of Satyam, Byrraju Ramalinga Raju resigned, confessing that he had manipulated the
accounts of Rs 7,000 crore in several forms. The global corporate
community was said to be shocked and scandalised.

In 2009, thei CBC took over the case and filed three partial charge sheets , over the course of the year.all charges
arising from the discovery phase were later merged into a single charge sheet.
On 10 April 2015, Byrraju Ramalinga Raju was convicted with 10 other members
On 2008, one independent director of the company,
US academician Mangalam Srinivasan, announced his resignation, followed by
three more independent directors, Vinod K Dham(famously known as the father of the
Pentium and an ex-Intel employee), M Rammohan Rao (Dean of the prestigious Indian
 School of Business), and Krishna Palepu (professor at Harvard Business School).
B. Ramalinga Raju resigned as chairman of Satyam on January 7, 2009, after admitting
to a financial scam involving over Rs. 7800 crore. In his letter, he indicated that his purchase
 of Maytas firms was his final attempt to replace fictional assets with genuine ones. It was like
 riding a tiger and not knowing how to get off without getting devoured, he said in his letter.
 Satyam’s proprietors, B Ramalinga Raju and his brother B Rama Raju, were detained by

 state police in Andhra Pradesh, and the firm was taken over by the Central Government.
Satyam-770x433.webp

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RAMALINGA RAJU
 Kingfisher Scam
The former member of parliament (Rajya Sabha) and a famous businessman, named Vijay Mallya, is the ex-chairman
of united spirits and the chairman of united breweries group indulged in beverage alcohol, fertilisers and real estate
business. He became the chairman of the company at the age of 28 and focussed on the growth of his family business
and company since then. He is also known to own a famous IPL team Royal Challenger Bangalore for a long period of
time. He also expanded his business outside the country in many foreign countries and also acquired berger paint in his
name. He has also been elected as the member of parliament two times from Karnataka state.
He invested all the collected funds in the airlines, as a result of which his kingfisher airlines became the popular
domestic Airlines in the country. He also wanted to expand the Airlines but the government imposed various
restrictions and did not allow it to carry on with international flights. As a consequence of this, he manipulated his own
united breweries company to buy another company going in loss . Deccan airlines and merged it with his own airlines
but could not make profits as desired and indeed suffered a great loss. 
In order to continue his business, he took heavy loans from various banks but was not paying it back
. Many banks declared him bankrupt and did not provide further loans but he continued to take it from
different banks using his influential position. Another unethical practice done by his airlines was that they
were not paying any PF and salaries to their employees and taxes to the government. With such great
losses continuously, he refused to pay the salaries of his employees and shut down his business.   
details of major loans and the amount taken by him is given below:

  Name of Bank  Loan amount

Axis bank  50 crores
Punjab and Sind bank 60 crores
Federal bank  90 crores 
Indian overseas bank  140 crores
United bank of India  430 crores
Bank of baroda  550 crores
IDBI 800 crores
PNB 800 crores
SBI 1600 crores
 Failure to repay the loan and to avoid criminal liability, he ran to another country
with all the money he took as loan in 2016  and has not returned yet. The various
reasons for the failure of Airlines could be:
 Bad business strategy
 Failure on the part of management
 High fuel prices
 Recession of 2008
 High cost of operation. 
 High ticket prices. 
Judgement of Royal Courts of justice
In this case, the government of India requested a court in London for the extradition
of Vijay Mallya from their country to India. It was argued that he ran from the
country after doing a scam with the intention to defraud the banks and people and
took all the money illegally with him and was engaged in money laundering and for
this reason, they want to take him back into the country. They again filed an
extradition request in 2017 in the court on the basis of which he was arrested and
granted bail again. This happened every time such a request was made in court. 
Vijay Mallya, on the other hand, contended the opposite of what the government of
India argued. The court opined that the appellant will not get a fair trial in India due
to political influence and pressure, and will be miserably tortured. They applied
human rights in a strict sense and denied the request of the Indian government. They
found the request of extradition by the Indian government opposing and against the
European convention because of poor prison conditions in India and ordered to
improve the conditions and facilities in prisons.  
VIJAY MALYA