[Note: Author and Contributor of this blog post is Risabh A. Gupta, 3rd Year Student, B.B.A. LL.B. (Hons.), National Law University, Odisha]
I.
INTRODUCTION
Corporate governance basically means an
entire system of rights, processes and controls which are established
internally and externally over the management of a business entity. Its prime
objective is to protect the interests of the stakeholders. This is achieved by
the process of auditing, proper functioning of the board of directors and apt
regulatory and legal framework. Before moving on, it is pertinent to briefly
discuss the infamous Satyam scam and the recent Reebok scam in order to aptly
comprehend the flaws currently prevailing concerning corporate governance.
II.
THE SAYTAM AND THE REEBOK SCAM
The
Satyam fraud in 2009 had perfectly exposed the inadequacies in India’s legal
and regulatory systems to tackle corporate wrongdoing of such unprecedented
dimensions. There was confirmed falsification of books of accounts and
inflation of the company’s financial position to the extent of over Rs.5,
000-6,000 crore.
Recently,
Reebok Scam to the tune of Rs 870 crore has once again portrayed the flimsy legal
and regulatory regime concerning corporate governance. The subsequent audit
carried out had found fake transactions with
unauthorized customers, allegedly concocted to exaggerate the company’s
revenue. Thus, it calls for a closer look at the current legal and regulatory
regime prevailing in India and what needs to be done in order to plug in the
loopholes.
III.
ROLE OF DIRECTORS & FAILURE TO REGULATE
In
the Satyam scam, the Satyam board, including its five independent directors,
had approved the acquisition of Maytas Infra and Maytas Properties given the
fact that acquisition was on a totally unrelated business. The fact that
independent directors are quite often friends or associates of the management
or controlling shareholders has become one of the major weakness of corporate
governance in India.
The
Directors have to be nominated to the Board. This is done de jure by the
shareholders but in reality it is done by other Directors. The shareholders
merely confirm the nomination, thereby, making it possible for people who are
known to the Directors to get elected. Therefore, the independence of the
directors and shareholders’ interest gets diluted.
IV.
THE INDEPENDENCE OF THE DIRECTORS
& THE BOARD UNDER COMPANIES BILL, 2012
The
new Companies Bill, 2012 tries to bring in various correctives measures.
Concept of Independent directors has been introduced for the first time in
Company Law. All listed companies are mandatorily required to appoint
independent directors. Atleast 1/3 of the Board should comprise of independent
directors. Term of an independent director shall be 5 years, with a further
extension of 5 years. After two consecutive terms, an independent director
shall not be eligible for reappointment for 3 years. An independent director is
not entitled to any remuneration other than sitting fee, reimbursement of
expenses for participation in the meeting. An Independent director is not
entitled for any stock options. Thus, these provisions would aid immensely in
keeping the independence of the board.
Further,
the new bill also mandates constitution of Stakeholders’ Relationship Committee
where the combined membership of the shareholders, debenture holders and other
security holders exceeds 1000 at any time during the financial year with the
chairman of the committee being a non-executive director to aptly take rational
decisions considering all the stakeholders.
V.
FAILURE TO REGULATE AUDITORS &
AUDITS
The
Satyam Scam posed serious questions about systematic regulatory efficacy,
predominantly pertaining to auditing and audit firm oversight. The statutory
auditor of Satyam, Price Waterhouse, one of the ‘big four’ international
accounting firms failed to check the auditing fraud for 8 consecutive years.
Even months after Satyam boss R. Raju had confessed to fudging the accounts,
the institute was still to take action against the two auditors who had signed
the Satyam accounts. Further, there are instances where the statutory auditors
have been the de facto internal auditors as well.
VI.
REGULATING AUDITORS & AUDITS
UNDER THE COMPANIES BILL, 2012
The
new Companies Bill, 2012 tries to plug in the loopholes and streamlines the
auditing process of the companies.
It
mandates compulsory rotation of individual auditors in every 5 years and of
audit firm every 10 years in every listed company. Rotation of auditing partner
and his team at specific interval could be done by the members of the company.
Auditing standards have been made mandatory in addition to accounting standards
and an auditor is liable to be disqualified if he has indebtedness to holding/subsidiary
company. Further, a person cannot be appointed as an auditor for more than 20
companies.
VII.
INADEQUATE POWER GIVEN TO SFIO
(SERIOUS FRAUDS INVESTIGATION OFFICE)
Serious
Frauds Investigation Office (SFIO) is the investigative arm of Ministry of
Corporate Affairs which is primarily concerned with investigation of corporate
scams. But in reality, SFIO has been an utmost failure.
Since
its inception in the year 2003, the SFIO still hasn’t made much success.
Contrast to this, its counterparts in UK and US have successfully convicted
multiple corporate scams and frauds with much wider success.
Lacunae
in SFIO
The
biggest drawback with the SFIO is that it operates within the Companies Act,
1956 and is just an investigative arm of the Ministry of Corporate Affairs. The
only statutory powers SFIO enjoys are under the Companies Act, 1956, even
though the frauds investigated by it were criminal offences. There is absence of clearly defined criteria for referring
cases to the SFIO in statute. Rather, the charter for SFIO provides that it
shall take up cases that have complexity, inter-departmental and
multi-disciplinary ramifications, or has substantial involvement of public
interest in terms of monetary misappropriation.
Comparison with UK SFO
(Serious Fraud Office)
Contrary to this, UK
SFO (Serious Frauds Office) has the power to investigate and prosecute and can
independently summon people and conduct raids. It has also clearly defined
criteria for speedy and timely investigation. In addition to this, SFO
functioning is governed by the Criminal Justice Act, 1987. Thus in all essence,
any case like Satyam in UK would most certainly be referred to SFO. But in the
absence of any such powers in India, the SFIO had to wait for its turn to
interrogate Raju brothers and seize documents. Further, all it can do is to
file a compliant with local police and the minister-in-charge has the
discretion to accept or reject the SFIO’s final report.
Overlapping of investigating agencies & absence of a
Nodal agency
The recent Reebok scam and the Satyam
Scam has aptly demonstrated that several other regulators and investigating
agencies, including SEBI, the ROC, Income Tax and the CID often leads to multiplicity
of regulators (sometimes operating at cross-purposes) which almost never
produce optimal results. Pertaining to the Reebok Scam, investigation by both
the Gurgaon Police and the SFIO has clearly created a very messy situation.
Further in Satyam case:-
a. SEBI was initially only investigating insider trading
charges.
b. RoC’s investigation covered only violation of Companies Act,
Section 372A in particular.
c. The Income Tax department had to send the report to the
Central Board of Direct Taxes.
This multiplicity of
agencies leads to coordination problems, which results in delaying the case and
confusing issues. Thus, a single regulator and a nodal agency will result in a
unified approach.
VIII.
STRENGTHENING OF SFIO IN COMPANIES BILL, 2012
The bill has accorded
the statutory recognition to the SFIO, in line with the UK SFO. The SFIO will
have the power to carry out arrests under Section 212(8). It also bars
investigation by any other agency if the case has been assigned to SFIO under
Section 212(2) thus creating a single nodal agency for investigation. It will also have the power to arrest in
respect of certain offences of the Bill which attract the punishment for fraud.
These offences shall be cognisable and the persons accused of any such offence
shall be released on bail subject to certain conditions provided in the
relevant clause in the Bill.
Drawbacks in Companies
Bill, 2012 concerning SFIO
Notwithstanding the
substantial steps taken by the Companies Bill, 2012 to give significant powers
to SFIO, still it fails to address the two issues of immense importance.
Firstly, the bill still doesn’t give the search and seizure power without the
prior approval of the Judicial Magistrate or as the case may be. Contrary to
this, other investigating agencies like Enforcement Directorate, Income Tax
authorities have all been accorded with search & seizure.
Secondly, the SFIO
cannot take a case suo mottu. It needs to get prior approval of the Central
govt. in order to start investigation.
Lastly, while the Companies Bill, 2012
has been passed in Lok Sabha, it is still languishing in Raj Sabha. It is
expected that the bill would be passed in this monsoon session at the earliest.
Further, the new Companies Bill, 2012 is a very welcome step concerning strengthening
of corporate governance and making India more conducive to all the stakeholders
concerned.
No comments :
Post a Comment