Corporate Governance issues in India

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What is Corporate Governance?

According to Cadbury Committee (UK), corporate governance is the system by which companies are directed and controlled. It refers to the set of rules and regulations, processes and procedures which ensure that a company is run in a way so as to achieve its goals and objectives, add value to the company and also provide benefits to all the stakeholders in the long run.

Evolution of Corporate Governance in India

The need for corporate governance standards was realized soon after the economic reforms of 1991. In 1998, the Confederation of Indian Industries (CII) came out with a voluntary code on corporate governance titled "Desirable Corporate Governance", based on the recommendations of a task force under Rahul Bajaj. In 2000, the SEBI came up with Clause 49 of the Listing Agreement, which all the listed companies on a stock exchange need to sign, that dealt with the issues of corporate governance based on the recommendations of Kumaramangalam Birla Committee.

The Clause initially dealt with issues such as protection of investors' interests, promoting transparency, adhering to international standards of information disclosure etc. among others. It was subsequently amended under the recommendations of various expert committees. For instance, based on Naresh Chandra Committee recommendations - the procedure for appointing auditors, the norms dealing with the relationship between auditor firm and the company etc. were amended. Later, based on Narayana Murthy Committee recommendations, the quality of financial disclosure, the responsibility of the audit committee were amended.

In 2013, the government introduced the new Companies Act which deals with corporate governance in a comprehensive manner.

Why are Corporate Governance norms needed in India?

Many companies in India, including the large corporate groups, were born as family-owned enterprises. Family members occupied managerial positions in such companies and took all the key business decisions. This practice had blurred the distinction between company's finances and that of family owners. With the evolution of equity markets, many such family-run businesses listed themselves on the stock markets. This led to a separation of the ownership from the management of firms. Despite this, the Promoters continue to wield disproportionate influence over company decisions.

Corporate Governance norms are needed to ensure that a company is run in the interest of all the stakeholders, without the promoters and the management lining their own pockets. Moreover, a company with good corporate governance standards enjoys greater investor confidence, adding value to its share price in the stock markets. Foreign Institutional/Portfolio Investors (FII/FPI) prefer to invest in those companies with good corporate governance.

India has a history of high profile scams like the stock market scams (of Harshad Mehta, Ketan Parekh), UTI scam, Satyam scandal etc. which were termed as the outcomes of failed corporate governance. Hence, there is a need to institutionalize stringent norms surrounding corporate governance to prevent their recurrence.

Issues in Corporate Governance in India

• Stressed balance sheets - The bad debt problem (NPAs), which has affected the corporate sector, is as much an outcome of bad corporate governance as it is due to the vagaries of the business cycle. Many expensive acquisitions were made in the last decade by companies without a proper approval from the shareholders. As a result, few of them paid off for the shareholders.
• The composition of the Board - The Companies Act, 2013 introduced several good corporate governance provisions such as, one-third of the company board should comprise of Independent Directors, the board should have at least one woman Director, the constitution of Audit Committee within the board etc. However, several companies still haven't appointed woman directors in their boards while some of them have named the women family members or friends of promoters as directors.
• Role of Independent Directors - Independent Directors were supposed to enhance the accountability of the board to the shareholders. As part of the Audit Committees, they were to ensure that the financial disclosure process was carried out as per the law. However, it was observed that they had failed to make their mark on company boards. Many of them fail to stand up to promoters' decisions if they find it to be against the interest of all the stakeholders. The main reason for their weakness is their removal process - they can be easily removed by the promoters or majority shareholders, affecting their independence.
• The conflict between promoters and management - since many companies are family owned enterprises, the promoters as majority shareholders continue to exercise disproportionate influence over business decisions. This sometimes leads to a conflict between the promoters and the management, which is responsible for the day-to-day functioning of the company. Recent instances of ousting of Tata group chairman by Tata Sons, and the forced exit of the CEO of Infosys, both due to differences between the top management and the promoters, have highlighted the weaknesses in our corporate governance norms. This conflict has also reflected the weaknesses in succession planning by the founders/promoters, many of them inherent inhibitions to let go of control over their companies.
• Executive Compensation - According to the new Companies Act, the nomination and remuneration committee of the Board (comprising a majority of independent directors) is to decide on the compensation to key employees. This needs to be approved by the shareholders. However, the top employees are paid exorbitant remuneration in certain instances where they allow a significant say to the promoters as quid pro quo. On the other hand, many small companies fail to offer competitive remuneration to attract talented professionals. Sometimes, exorbitant remuneration to the top employees can become an issue of conflict between promoters and management, like the case of Infosys.

Reforms needed

In 2012, SEBI constituted a committee under Adi Godrej and based on its recommendations, it has amended the Clause 49 of Listing Agreement. Some new norms were introduced such as

• separate meetings of Independent Directors.
• performance evaluation for all Directors, including Independent Directors.
• compulsorily putting in place a whistleblower mechanism.
• constitution of a Risk Management Committee

Recently, the Uday Kotak committee constituted by SEBI submitted its report which recommended several reforms to improve corporate governance in India such as,

• at least half of the board members should be independent directors, and there must be at least one woman independent director.
• detailed reasons must be given for the removal of independent directors. This can significantly enhance their independent functioning.
• separating the roles of chairperson and managing director, and the chairperson should be a non-executive director.
• significant improvements in disclosure such as - providing financial information on their websites in a manner that is easily accessible to investors, all listed companies should publish their cash flow statements on a half-yearly basis etc.

Good Corporate Governance standards are essential to ensure significant value enhancement to all the stakeholders of a company, including the minority shareholders, the government and the economy. India has always stood at the top in protecting the interests minority shareholders (at 4th place in Ease of Doing Business Report 2018 by World Bank) and this has been attributed to positive corporate governance norms that have been put in place by the government and SEBI.

Companies having Corporate Governance Issues

Stocks	Alleged Governance Issues and Accusations
Videocon Group	Manipulated bank officials to receive loans
IL&FS	Defaulted repayments and procedural lapses supported by the relaxed attitude of top management
Vakrangee Limited	Mismanagement in cash flows and manipulated price and volume of its own stock
Manpasand Beverages	GST evasion worth ₹ 40 Crore and fraudulent books of accounts.
DHFL	Diverting funds of ₹ 31,000 Crore from the company and subsequently defaulting on interest payments.
Jet Airways	Founder chairman's egoistic and selfish approach towards conducting the business of the company.
YES Bank	Many transactions were not in the interest of the bank's profitability.
PC Jeweller	Hidden business relations with Vakrangee
Punjab National Bank	Bank officials issued fraudulent letters of undertaking.
Infibeam Avenues	Loaned unsecured, interest-free loans to its stressed subsidiaries
Fortis Healthcare	Regulatory lapses in the transfer of funds to some promoter-linked firms
InterGlobe Aviation	The battle between two co-promoters on misuse of power in the related-party transaction.
Sun Pharmaceuticals	Whistleblower points out related-party transaction with Aditya Medisales
CG Power and IS	Accounting scandal by understating the liabilities of the company and fraudulent related-party transaction to promoter company
ICICI Bank	Disbursement of loan to Videocon Group by former MD and CEO Chanda Kochhar for personal benefits.

JET AIRWAYS (INDIA) LIMITED (‘JET AIRWAYS’)

Background:

Jet Airways was one of the largest airlines in India, Headquartered in Mumbai. Mr. Naresh Goyal is the Founder of Jet Airways.

What Happened?

Jet Airways became a debt-ridden Company. Due to continues increase in debt level, lenders denied to release further funds to keep carrier flying. As a result, Jet Airways closed reservations to international services, effective April 2019 and subsequently suspended all operations citing financial issues. Further, it has stranded approximately 20,000 employees.

Reasons for failure:

Poor Management: The poor decision making and management of Company lead to heavy losses and increase in debt of the Company. Company’s decision lacked transparency and therefore, the board of directors could not contribute to operating and financing decisions. Costly Purchase: Aviation experts believe that the management of the Company has repeatedly ingored the advise of professionals and purchased Jets at high cost. Budget Airlines: Due to stiff competition from hugely successful airlines, like Indigo, SpiceJet and Go Air etc. Jet Airways always catered to corporates and failed to recognise that low-cost carriers were attracting customers who were price sensitive. Failure to attract investors: Reason for financial predicament is failure to find a strategic investor to pump money in to Jet Airways.

DEWAN HOUSING FINANCE CORPORATION LIMITED (‘DHFL’)

Background:

Dewan Housing Finance Corporation Limited is a leading housing finance company, headquartered in Mumbai. Mr. Rajesh Kumar Wadhawan is the Founder of DHFL.

What Happened?

DHFL has sanctioned and paid funds in unsecured and dubious loans. Loan amounting to thousands of crores of rupees were given to newly incorporated shell companies. Shell Companies are operating from common email address. The said loans were provided without any security or collateral and the proceeds were utilized by for private asset creation. DHFL has not adequately disclosed the terms of loan and repayment in the financial statements. They also ensured that most of the shell companies have hidden the name of the lender i.e. DHFL. The act of DHFL ensured that the recovery of such dubious loans would be impossible since the companies or their directors themselves do not own any assets. The promoters and their associates used these dubious loans to acquire personal assets which were completely ring-fenced from the recovery process since the companies or their directors themselves do not own any of these assets. Due to poor Corporate Governance concerns, the Reserve Bank of India (RBI) superseded the board of debt-laden DHFL. RBI has initiated the process of resolution of the Company under the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Finance Service providers and Application to Adjudicating Authority rules, 2019.

Reasons for failure:

DHFL case is absolute failure of Corporate Governance. The act of promotors in diversion of loan amounts to shell company without scrutiny or security shows a complete deviation from the corporate governance policies.

YES BANK LIMITED (‘YES BANK’)

Background:

Yes Bank Limited is an Indian private sector bank, founded by Rana Kapoor and Ashok Kapur in 2004. Yes Bank is India’s fourth largest private sector bank and is a high quality, customer centric and service driven Bank.

What Happened?

In 2015, RBI conducted an asset quality review (AQR) to clean up the rising toxic loan problem in the country’s financial sector. Several banks were asked to report loan divergences i.e., the difference between the RBI’s assessment of bad loans and the one reported by the bank, in their quarterly results. At a time when most banks were struggling with rising bad loans, Yes Bank Ltd had managed to keep a check on its non-performing assets (NPAs). During the AQR review in 2015, RBI found out some serious issues related to loan divergence and NPAs at Yes Bank Ltd.

Reasons for failure:

Yes Bank consistently showed NPAs below 2%. The gross NPAs reported by the bank in Finanancial Year 2016 were at Rs. 748.98 Crores. It turned out that the NPAs identified by RBI were at Rs. 4925.68 Crores. A whopping 557% higher NPA was observed during the AQR review with respect to actual reported. The Gross NPA % disclosed by Yes Bank as on March 2016 stood at 0.76%. This Gross NPA actually should have been at 5.01% as per RBI observations. RBI also observed very astounding deviation of 1166% for Net NPAs. The Net NPA % disclosed by Yes Bank was at 0.29% for Mar 2016, which according to RBI should have been 3.67%. Post AQR review, RBI detected a large deviation of Rs. 4,176 crore in the reported gross NPAs in the books of accounts of Yes Bank for 2015-16. Further, the RBI detected gross NPAs at Rs. 8,373.8 crore for Yes Bank for 2016-17 against the declared gross NPAs at Rs. 2,018 crore. Loan divergence is mere account jugglery in Yes Bank Ltd. RBI has considered this as the persistent governance and compliance failures and violations of statutory and regulatory rules at Yes Bank Ltd.

INTERGLOBE AVIATION LIMITED (‘INDIGO’)

Background:

Interglobe Aviation Limited is one of the largest Indian Airline Company, founded by Rakesh Gangwal and Rahu Bhatia.

What Happened?

Rakesh Gangwal alleged serious governance lapses by its co-founder Rahul Bhatia. However, Rahul Bhatia had denied about any such governance failures. As the issue was going-on for over a year, Gangwal reach out to Securities Exchange Board of India for its intervention to address the problem and solution on the matter. Gangwal further alleged that the Company is not adequately following core principles and values of governance. He further said that even Betel Shop would have managed matters in a better way. Gangwal also questioned certain related party transactions and said that the Shareholder’s Agreement provides Rahul Bhatia controlling rights over Indigo.

Reasons for failure:

The Company did not follow due process for Related Party Transaction approvals and other Corporate Governance measures.

Source : 

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