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Men in Suits

Instances of biggest corporate governance failures in India

Numerous small enterprises in India have been severely impacted by the worldwide pandemic. Small- and medium-sized enterprises are uncertain of their ability to withstand the many crises that persist. COVID-19 has not only raised the likelihood of corruption in the public health sector, but also in the private sector. Failures in corporate governance have resulted in the absconding of business magnates Vijay Mallya and Lalit Modi from India and the arrest of corporate titans Rana Kapoor, Chanda Kochhar, and the Singh brothers.

Without #unitedagainstcorruption, a return to a corporate climate characterised by fairness and honesty will be impossible. Corporate governance's holy grail is not infallible. When huge firms like Jet Airways, DHFL, YES Bank, IL&FS, and Kingfisher Airlines failed, investors learned this the hard way. The GST and the insolvency law have been accused, but noncompliance with corporate governance regulations and disregard for the law cannot be ruled out.

Unethical business practises

Takeovers and mergers necessitate capital restructuring, which provides fertile ground for corruption. If there is no independent director on the Board, there is a possibility that members will not adhere to the legislation strictly. A board member with vested interests in the acquisition of the company could push the takeover. This would violate the goal of the exercise, which was to maximise shareholder value, and the individual in issue would pocket the profits.

Some businesses have been known to manipulate their finances to represent gains that have not yet been realised. This is misleading for auditors and other parties reviewing the organization's financial books.

Failures in corporate governance in India

This article examines how corrupt business practises contributed to some of India's largest corporate governance disasters.

Tata-Mistry aftermath

Since 2006, Cyrus Mistry has served as a director of Tata Sons Ltd. The majority of shareholdings were held by Tata family trusts. This was done to ensure that the family retains control even after Cyrus Mistry joined. Mistry's choices were repeatedly opposed by the Board, which resulted in his dismissal during one meeting. Mistry asserted that the nominee directors of the trust, including Ratan Tata, who were the "shadow directors" of Tata Sons Ltd., exercised a dominant level of influence.

Mistry stated that the promoters never gave him a free hand to govern the company and that they were inflexible with regard to their own projects. He also claimed that the independent directors lacked independence in their operations. Nusli Wadia, an independent director, was also terminated for advocating for Cyrus Mistry to keep his chairmanship of group companies. The promoters have clearly abused their position of authority.

ICICI Bank-Videocon case of bribery

Deepak Kochhar was seized by the Enforcement Directorate in September 2020, after it filed a criminal case for money laundering against the Kochhars, Videocon's Dhoot, and others, based on a FIR filed by the Central Bureau of Investigation (CBI).

On September 8, 2009, Videocon Industries allegedly transferred Rs. 64 crore of a Rs. 300 crore loan sanctioned by a panel of ICICI Bank led by Chanda Kochhar (wife of Deepak Kochhar) to Videocon International Electronics Limited to Nupower Renewables Pvt Ltd (NRPL). The funds were sent one day after the loan was disbursed. Deepak Kochhar is the owner of NRPL, formerly called Nupower Renewables Limited (NRL).

PNB-Nirav Modi Scam

In February 2018, the Punjab National Bank (PNB), one of the country's largest public-sector lenders, was embroiled in a Rs. 11,400 crore transaction fraud investigation. The bank noticed and warned the Bombay Stock Exchange about $1771.69 million in "fraudulent and unauthorised transactions" in one of its Mumbai branches (approx). The CBI then got two allegations from PNB claiming fraudulent transactions totaling around Rs. 11,400 crore against billionaire diamantaire Nirav Modi and a jewellery firm. This was in addition to the Rs. 280 crore fraud case for which Nirav Modi was already being investigated, which was also initiated by PNB. Modi is the subject of two distinct criminal cases. The Central Bureau of Investigation is investigating a large-scale fraud perpetrated against PNB via the fraudulent acquisition of "Letters of Understanding," while the Enforcement Directorate is probing the laundering of the proceeds of this fraud.

The Satyam affair

Ironically, Satyam was a publicly traded business with a strong reputation, having won the Golden Peacock Global Award for corporate governance at one point. However, the corporation and its auditors conspired to deceive investors, regulators, the board, and other stakeholders through false accounting methods. The issue was exposed when the chairman of the business, Ramalinga Raju, admitted to misrepresenting accounting standards, after which regulators such as SEBI began to take action.

The problem began when Satyam attempted to invest Rs. 7,000 crores in Maytas Properties and Maytas Infrastructure. These businesses were owned by Raju's relatives. The board approved the investments on 16 December 2008, but the investors rejected them. The firm's accounts were altered by overstating assets such as cash and bank deposits and understating liabilities. Consequently, investors filed multiple lawsuits against Satyam.

The judgement of the Satyam board was reversed after the Maytas deal and ensuing litigation. The World Bank prohibited Satyam from conducting any business for eight years, while four independent directors resigned.

The Satyam scandal prompted a response from many sectors of India's business community, which demanded an immediate change in legislative measures. Several organisations, such as the Confederation of Indian Industries (CII), the National Association of Software and Services committee, and the SEBI Committee on disclosure and accounting standards, among others, have begun examining the proposed changes to the Audit Committee, Shareholder Rights, and Whistleblower policy. These committees drafted a variety of recommendations that were eventually considered by the legislature.

Malvinder and Shivinder Singh

The now infamous Singh brothers Shivinder and Malvinder, who were under the scrutiny of the Economic Offence Wing (EoW) of the Delhi police for a fraudulent loan from Laxmi Vilas Bank, are accused of syphoning nearly $2 billion from their corporate empire, which included Ranbaxy, Fortis Healthcare, and Religare Enterprises Ltd, among others (REL).

Malvinder and Shivinder are accused of misappropriating funds from Religare Finvest Limited (RFL), a subsidiary of REL. Malvinder and Shivinder, along with other REL executives, are accused of taking out loans in the name of RFL and diverting the funds to other businesses. This resulted in losses of Rs 2,387 crore for the corporation! These accusations against Malvinder and Shivinder Singh are only the top of the iceberg. According to a 2018 story from Business Today, the brothers managed to waste a staggering Rs. 22,500 crore in just ten years.

In a case, Malvinder accused his brother Shivinder, the Dhillon family, and Sunil Godhwani (former head of REL) of criminal conspiracy, cheating, and fraud for allegedly syphoning off thousands of crores from RHC Holdings, the holding company that had promoted Fortis Hospitals and Religare. In the meantime, SEBI has accused the Singh brothers of transferring 403 crores of rupees from Fortis Healthcare to RHC.

Dewan Housing Finance Corporation (DHFL)

The investigation into the DHFL affair, the largest corporate fraud of 2019, is ongoing. It is a classic example of tampering with the company's books, which we stated earlier, causing problems. In this instance, the "Bandra Books" were at the centre of the ongoing investigation into a large corporate fraud. In truth, the alleged Bandra branch for which a parallel collection of publications exists does not exist. It was an entirely fictitious corporation that allowed unscrupulous business practises to flourish.

A forensic assessment stated, "of the Rs. 23,815 crores listed as disbursed to Bandra Book businesses in the Company's books, only Rs. 11,755.79 crores was really disbursed" to 91 organisations, but was represented as including 2,60,315 home loan accounts. In fact, when the auditor "checked" some of these 91 businesses, he discovered that 34 of them had put a portion of the loan back into DHFL-affiliated enterprises. If the fraudulent income in the Bandra records is removed, DHFL has incurred losses for years, according to SEBI. The deception enabled DHFL to raise a staggering Rs. 24,000 crores through the sale of debt instruments to the public.

YES Bank

The RBI (Reserve Bank of India) took control of YES Bank in March 2020 in the absence of a realistic recovery strategy and in the interest of YES Bank's depositors. The history of YES Bank reads like a John Grisham thriller. It was started in 1999 as an NBFC (non-bank financial company) and transformed into a bank in 2003. Former Managing Director and Chief Executive Officer Rana Kapoor was known for propping up the market by approving the disbursement of loans to corporate borrowers refused by other banks. The bank charged a substantial up-front fee, and the majority of debtors defaulted at will.

Yes Bank's financial condition has steadily deteriorated due in major part to its inability to obtain capital to handle possible loan losses and resulting downgrades, causing investors to invoke bond covenants and withdrawal of deposits. In recent years, the bank has also encountered governance challenges and policies that have contributed to its continuous deterioration. The RBI was in frequent communication with the bank's management in an effort to strengthen the institution's liquidity and balance sheet. The bank management had informed the RBI that it was in negotiations with multiple investors, which were expected to prove fruitful.

According to a filing on the stock exchange dated February 12, 2020, RBI was also in contact with a few private equity groups to explore ways to inject funds. These investors did engage in negotiations with senior RBI officials, but ultimately did not invest due to a variety of factors. Since a bank and market-led revival is preferable to a regulatory restructuring, the RBI made every effort to promote such a process and provided YES Bank's management enough opportunity to develop a credible revival plan, which did not materialise. In the interim, the bank was experiencing a consistent outflow of liquidity. Shortly thereafter, the bank failed, and RBI was compelled to petition the Central Government to impose a moratorium on YES Bank.

Cafe Coffee Day

Cafe Coffee Day, which loyalists referred to as CCD, once had over 1,750 locations across the United States. In the 2000s, it was India's largest coffee chain. The proprietor V. Siddhartha hails from a distinguished family with a 140-year history of coffee bean cultivation. A conversation with a German coffee maker encouraged him to create Cafe Coffee Day as a competitor to Starbucks just as the youth cafe culture was gaining momentum. The chain went public in 2015, and it appeared that things could only improve, since Coca Cola was rumoured to spend a staggering 2,500 crores in the company.

In September 2017, the Income Tax (I-T) authorities conducted raids at more than 20 locations associated with Siddhartha. According to reports, he was in deep debt. In the fiscal year ended on March 31, 2018, His Coffee Day Enterprises Ltd's net loss widened to Rs 67.71 crore from Rs 22.28 crore in the previous year. This despite the fact that revenues rose to 122.32 crores. He vanished abruptly one evening in 2019.

In a letter to the CCD Board, he stated that "one of the private equity partners" was pressuring him to buy back shares, a deal he had largely completed by borrowing a huge sum of money from a "friend" six months prior. His body was discovered in Mangaluru 36 hours after he was reported missing. It appears to have been a suicide.

There is evidence that Siddhartha took on debt in his private capacity to purchase land and engage in projects with a lengthy gestation period, and his creditors are demanding immediate returns. The decade of the 2000s was marked by the emergence of Cafe Coffee Day and the accumulation of debt. The corporation required funding for operations and capital expenditures. In 2010, close to $149 million was invested by Standard Chartered Private Equity (Mauritius) II Ltd, KKR Mauritius PE Investments II Ltd, and Arduino Holdings Ltd (who later transferred the debentures to NLS Mauritius LLC). Standard Chartered Private Equity (Mauritius) II Ltd's mandatorily convertible preference shares and KKR Mauritius PE Investments II Ltd's and NLS Mauritius LLC's mandatorily convertible debentures were converted into equity shares at the time of listing. By June 2015, the aggregate debt had ballooned to a staggering Rs. 2,700 crore, which the board was unable to untangle.

Jet Airline

Prior to 2018, Jet Airways was the second largest airline in India, with a 13.8% market share. It ceased operations on April 18, 2019, after running out of money to operate, leaving more than 15,000 staff unemployed. The corporation owes approximately Rs. 8,500 crore to banks. Jet Airways owes an additional Rs. 25,000 crores to lessors, staff, and other businesses. Chairman Naresh Goyal's failings in corporate governance are the culprits. Jet Airways' demise follows a succession of other failed airlines, such as Kingfisher, Sahara, and Deccan, indicating poor corporate governance within the airline industry.

The majority of the airline was controlled by the Goyal family, and Naresh Goyal was the chairman of the board. A promoter-led board frequently runs the risk of becoming spineless, serving at the promoter-whim chairman's and command. In November 2018, two independent directors, Vikram Mehta Singh and Ranjan Mathai, resigned from the Board. The board's decision to reject Tata Group's investment offer was fiscally irresponsible, as the agreement would have infused funds and saved the airline. It also appears that the decision was taken with the promoter's interests in mind rather than that of the stakeholders and employees.

These disastrous failures could have been avoided with good corporate governance by the board of directors and by right involvement of independent directors. Thus it is imperative for the board to have an impeccable understanding and experience of corporate governance. Furthermore when promoter directors takes biased calls, independent directors are supposed to interfere and ensure sustainable decisions’ have been taken.

Thus role of independent directors have become extremely important to avoid such goliath corporate failures. There are comprehensive certifications available for imparting the comprehensive knowledge for independent directors, it is need of time that existing independent directors and the ones who aspire to become one, should signup such programmes and be future-ready with the required competence.

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