Notes on Corporate Scams and Governance Issues

Corporate scams and scandals in recent years have significantly shaken public confidence in
corporate management. Events like the Harshad Mehta scandal are still prominent in the minds
of those connected with corporate shareholding or who are educated and socially conscious.
The need for corporate governance is considered imperative for reviving investors' confidence in
the corporate sector to support the economic development of society. Corporate governance
refers to the way a corporation is governed, the technique by which companies are directed and
managed, and carrying business according to stakeholders' desires. It is conducted by the
board of Directors and concerned committees for the benefit of the company's stakeholders. It is
about balancing individual and societal goals, as well as economic and social goals.

Despite efforts to improve corporate governance practices, incidences of non-compliance,

evasion, and wrong reporting have not subsided globally. This raises questions about whether
stricter regulations are needed or if businesses are inherently willing to do the wrong things. A
common thread of dissonance found in corporate scandals is a lack of 'Conscious Commitment'
in letter and spirit to core values like honesty, integrity, and transparency by the senior
leadership team. History regularly produces headline-making scandals. Financial scandals have
always been one of the major reasons for changes in company law.

The sources discuss several major corporate governance failures, focusing particularly on the
Indian context as requested.

Detailed Analysis of Indian Corporate Failures

Satyam Computer Services Ltd.

The Satyam scandal, dubbed 'India's own Enron', was exposed early in 2009. It occurred
during a period when India was facing both a financial and an ethical crisis. The scam became a
landmark event in India.

●​ Background: Satyam Computer Services Ltd was founded in 1987 in Hyderabad by

brothers Rama Raju and Ramalinga Raju. The name 'Satyam' means 'Truth' in Sanskrit.
The company grew rapidly, offering IT and BPO services, becoming one of the top
players and eventually the fourth-largest IT software exporter in India after TCS, Wipro,
and Infosys. At its peak, Satyam employed over 50,000 people and operated in over 60
countries. It was seen as an Indian success story with seemingly perfect financials,
crossing $2 billion in 2008 and receiving accolades for corporate governance and
accountability. Mr. Raju himself was revered for his business acumen.
●​ The Scandal Unfolds: In late 2008, the board decided to take over Maytas, a real
estate company owned by Mr Raju. Shareholder opposition led to the decision being
reversed within 12 hours, impacting the stock price. Around the same time, the World
Bank barred Satyam from doing business for 8 years, alleging failure to maintain
documentation and providing improper benefits to bank staff. Satyam initially demanded
an explanation and apology from the World Bank.
●​ The Confession: On 7 January 2009, Ramalinga Raju sent an email to SEBI and stock
exchanges confessing that he had manipulated the company’s accounts by
approximately Rs. 7,000 crores. This confession shocked investors and clients
worldwide.
●​ How the Fraud Was Committed: The manipulation began as early as 1999, with Mr
Raju inflating quarterly profits to meet analyst expectations. For example, results
announced on 17 October 2009 overstated quarterly revenues by 75% and profits by
97%. Raju, along with the company’s global head for internal audit, created fake
customer identities and fake invoices to inflate revenue. Mr Raju used his personal
computer to create fake bank statements to inflate the balance sheet with cash that
didn't exist. The increased share price resulting from these manipulations allowed Raju
to sell shares for profit while maintaining just enough to remain part of the company.
Cash raised from markets in the US never appeared on the balance sheets. Additionally,
Raju created records for fake employees and withdrew their salaries, amounting to $3
million monthly.
●​ Failure of Gatekeepers: A key question was how Raju managed this fraud in a large
company. The failure of the external auditor, PriceWaterhouseCoopers (PwC), is
highlighted as significant. PwC, having audited Satyam for almost 9 years, seemingly did
not notice fake bills and overstated cash balances, missing obvious red flags like the
company not investing its large cash reserves in interest-yielding accounts. Suspicion
towards PwC grew when it was revealed they were paid twice the normal fees. While
PwC failed to detect the fraud for years, Merrill Lynch discovered it in just 10 days during
due diligence. PwC initially claimed reliance on management-provided information, but
CBI investigations later found PwC guilty of conspiracy, alleging they were paid more
and relied on Raju's documents instead of independent investigation. The case lays
down the need for strict protocols for auditors.
●​ Attempted Cover-up and Exposure: Raju's last resort plan was to have Satyam take
over Maytas, which would explain the non-existent cash. This plan was foiled by
shareholder opposition, forcing Raju to confess. Anonymous emails exposing the fraud
were also received by company director Krishna Palepu, who forwarded them to the
auditor, PwC, but was initially assured there were no truths in the mail.
●​ Aftermath: Two days after the confession, Raju was arrested and charged with criminal
conspiracy, breach of trust, and forgery. Satyam's shares plummeted. The CBI
investigation found land deeds, fake employee records, and estimated the scam at over
Rs. 7,000 crores, later estimated as financial misstatements to the tune of approximately
Rs 12,320 crore. PwC was found guilty and its license temporarily revoked. The scandal
negatively impacted investor confidence in other companies audited by PwC. The Indian
stock market experienced turmoil. The government intervened, appointing a new board
to sell the company quickly. Tech Mahindra won the bid and acquired Satyam. Raju and
others were granted bail in 2011 and sentenced to 7 years in prison in 2015. The Satyam
Scam significantly affected CA and audit firms, highlighting the critical importance of
ethics and corporate governance for professionals. White-collar crimes like this damage
the company, the industry, and the country.
Kingfisher Airlines

The Kingfisher Airlines (KFA) scandal involves Vijay Mallya and the collapse of his airline
business.

●​ Background: Vijay Mallya launched Kingfisher Airlines in 2005 with an ambition to

expand it globally and provide luxurious facilities, treating passengers as guests. It
became the second-largest domestic airline in India.
●​ Adverse Decisions Leading to Failure: Impatient to launch international flights before
meeting the regulatory 5/20 rule (5 years domestic experience, 20 airplanes), Mallya
acquired Air Deccan, a low-cost airline. This created a challenge as KFA was luxurious
and Air Deccan was the cheapest. He rebranded Air Deccan as 'Kingfisher Red' and
categorised the airlines by facility level. However, Kingfisher Red offered lavish facilities
similar to KFA at lower costs, leading passengers to prefer it. KFA's market share
declined, and operative costs turned into debts. To balance, he increased Kingfisher
Red's fare, causing passengers to leave even that airline.
●​ Reasons for Failure: The main reasons for the failure were the increase in ticket prices,
fuel inflation, and the economic slowdown/recession in 2008.
●​ Impact and Financial Distress: The airline business went into downfall. Airports
imposed pay-first policies for landing, and Mallya was banned from buying fuel from
major Indian oil companies due to existing debts, with one company requiring cash
payment in advance due to loss of faith.
●​ Attempts to Secure Funds: Facing financial crisis, Mallya sought Foreign Direct
Investment (FDI) and managed to convince Etihad Airways to invest. However, FDI in
airlines was not allowed in India until 2012. He tried to convince the government to
change policies but faced delays.
●​ Neglect of Employees and Closure: During this period, Mallya reportedly engaged in
other activities like making Kingfisher Calendars instead of focusing on the business
crisis. He failed to pay employee salaries, leading to strikes and employees leaving.
Kingfisher Airlines eventually closed, and its license was cancelled in December 2012.
●​ Loans and Debt Restructuring: The last option was taking loans from banks, primarily
targeting Public Sector Undertaking (PSU) Banks. He took loans from seventeen banks.
Some private banks were reluctant, but HDFC and ICICI banks gave loans against UB
Group securities and later recovered their money. After receiving massive loans, Mallya
applied for 'debt restructuring', proposing to convert debt into equity (giving shares to the
bank). He artificially valued KFA shares much higher than their market trading price to
wave off debts.
●​ Political Connection: A significant factor enabling Mallya to secure loans despite the
failing business and low credibility was his membership in Rajya Sabha and good
political connections. Banks were allegedly pressurized by government officials to grant
loans, including SBI Bangalore which granted a large loan. It was exposed that P.
Chidambaram, the then Finance Minister, allegedly helped him obtain loans, and SBI
loosened its policies under pressure.
●​ Escape and Allegations: When the debt reached Rs. 9,000 crores, Mallya offered to
pay only the principal amount, demanding the interest be waived. While negotiating, he
 escaped from India and settled in Britain. He is now on India's 'Wanted List' for wilful
default. A non-bailable warrant was issued against him, and he was classified as a
'proclaimed offender' for avoiding appearance.
●​ Lack of Corporate Ethics: Mallya is accused of failing his fiduciary duties to
employees, shareholders, and investors, compromising corporate ethics when buying
Deccan Airlines (reportedly paying Rs 30 crores to the owner without shareholder
knowledge), and misusing power and connections to get loans.
●​ Aftermath: Following the scam, the Central Vigilance Commission (CVC) directed PSU
banks to strengthen loan verification. SBI also affirmed learning lessons and protecting
public money. The general public suffers from the loss of public money collected as tax.

PNB Heist

The Punjab National Bank (PNB) Heist involved a large fraud disclosed by PNB in 2018.

●​ The Fraud: PNB revealed a Rs 11,000 crore fraud allegedly perpetrated by diamantaire
Nirav Modi. The fraud reportedly dated back to 2011.
●​ How it Happened: The fraud was led by Nirav Modi, reportedly assisted by Gokulnath
Shetty, a former deputy general manager in PNB's foreign-exchange department. Modi,
his relative Mehul Choksi, and companies linked to them colluded with Shetty. Between
2011 and January 2017, Shetty allegedly issued several fake PNB Letters of
Undertaking (LoUs) without requiring any collateral. These fake guarantees were then
used to obtain loans from overseas branches of Indian banks. To avoid detection, they
reportedly bypassed PNB's internal messaging system and placed instructions via the
Swift global payment system.
●​ Exposure: The fraud came to light in January 2018 when representatives of Modi's
companies approached PNB for a new loan. By then, Shetty had retired, and his
successor refused the request. When the firms claimed they had received such facilities
before, the branch records showed no details, leading to the discovery of the fake LoUs.
●​ Aftermath: PNB's shares plunged upon the news. PNB stated it would repay other
banks their dues from internal resources. The government requested reports from all
banks regarding this and similar incidents. PNB's CEO mentioned Modi had reached out
with a repayment plan, but PNB sought more details. Nirav Modi reportedly left India
before the CBI complaint was filed, and his and Mehul Choksi's passports were
suspended.

IL&FS Group Crisis

The Infrastructure Leasing & Financial Services Limited (IL&FS) Group Crisis involved a
severe liquidity crisis and alleged mismanagement.

●​ Background: IL&FS is a systemically important Core Investment Company in India,

involved in lending and investments in its group companies across sectors like Energy,
Transportation, and Financial Services. It was initially promoted by major financial
institutions like the Central Bank of India, HDFC Limited, and the Unit Trust of India.
 ●​ The Crisis: The group faced a severe liquidity crisis with over Rs. 91,000 crores in debt.
Starting in July 2018, subsidiaries began reporting difficulty repaying loans and deposits.
IL&FS repeatedly failed to service its debt.
●​ Government Intervention: Due to the potential for a contagion effect in the financial
market, the Central Government filed an application under Sections 241 and 242 of the
Companies Act, 2013, before the National Company Law Tribunal (NCLT). The
government sought the immediate suspension of the existing Board of Directors and the
appointment of new directors, alleging massive mismanagement of public funds.
●​ NCLT and NCLAT Actions: The NCLT suspended the existing board and reconstituted
it with six government-proposed members, appointing Mr. Uday Kotak as the chairman
of the new board. The new board was tasked with resolving the crisis. The suspended
directors were restrained from alienating personal assets. Immunity was granted to the
new directors for past actions of the suspended board. A moratorium against creditor
actions was sought to provide a period of calm for the resolution process; initially
declined by NCLT, it was granted on an interim basis by the National Company Law
Appellate Tribunal (NCLAT).
●​ Role of Auditors and Investigations: The Serious Fraud Investigation Office (SFIO)
submitted an interim report in November 2018. Based on this report and findings by the
Institute of Chartered Accountants of India (ICAI), the Central Government applied for
orders to restrain additional respondents from alienating properties. ICAI, considering the
financial statements and the state of the companies, suo motu reviewed the statutory
auditors' performance and found key lapses, shortcomings, and manipulations, holding
them prima facie guilty of professional misconduct.
●​ Legal Proceedings Against Auditors: Based on SFIO and ICAI findings, the Central
Government sought reopening of IL&FS books for the past five years. SFIO later filed a
charge sheet against 30 parties, including two auditor firms, Deloitte Haskins and Sells
and BSR and Associates LLP, for concealing information, not flagging criminal
conspiracy, and misreporting financials. The Ministry of Corporate Affairs (MCA) moved
against these audit firms and their partners under Section 140(5) of the Companies Act,
seeking debarment and attachment of properties for their alleged role in "perpetuating
the fraud". The Supreme Court allowed SFIO to reopen and recast accounts. The
prosecuted auditors have argued before the NCLT that they cannot be banned based on
prima facie evidence or double-punished if they have already resigned.

ICICI Scam and Yes Bank Debacle

Note: The provided sources do not contain detailed information about the ICICI scam involving
Chanda Kochhar or the Yes Bank debacle involving Rana Kapoor. The following information is
not from the sources and may require independent verification.

●​ ICICI Scam: This involved allegations of quid pro quo deals between former ICICI Bank
CEO Chanda Kochhar and the Videocon Group. It is alleged that Kochhar sanctioned
loans to Videocon Group companies while her husband, Deepak Kochhar, received
investments from Videocon into his company, Nupower Renewables. This raised
concerns about conflict of interest and improper lending practices.
 ●​ Yes Bank Debacle: Yes Bank faced a severe crisis primarily linked to bad loans to
corporate entities. Its co-founder, Rana Kapoor, was arrested in 2020 by the
Enforcement Directorate on money laundering charges. The crisis involved allegations of
corruption, favouritism in lending, and governance failures at the highest level, leading to
a significant decline in the bank's financial health and share value.

Common Governance Issues in Corporate Failures

Several common corporate governance issues contribute to corporate failures, evident in the
cases discussed and highlighted in the sources.

●​ Lack of Board Effectiveness: Boards often suffer from limitations in skills and
competence. Non-executive directors may lack the industry expertise required to
effectively monitor and control senior executives. Examples include directors lacking
refining experience at BP during a major incident or NEDs at Independent Insurance
lacking insurance expertise. Signs include frequent changes in management leading to
issues in addressing shareholder concerns.
●​ Board's Risk Blindness: This refers to the board's failure to identify or adequately
respond to significant risks facing the company. The Vivendi collapse, for instance,
highlighted an audit committee that failed to warn the board about risks associated with
deceptive accounting and liquidity problems.
●​ Poor Leadership on Ethos: Corporate failures often stem from a lack of 'Conscious
Commitment' to core values like honesty, integrity, and transparency by senior
leadership. This can foster a culture where unethical or fraudulent activities flourish, as
seen in WorldCom where the culture of the firm was a problem passed down from top
management.
●​ Defective Communication: Failures can arise from poor communication, both within
the organisation and with stakeholders. For instance, lack of communication with
shareholders is a sign of poor corporate governance.
●​ Inappropriate Incentives: Compensation or bonus schemes that do not align with
long-term value creation or include adherence to ethical standards can encourage risky
or unethical behaviour. For example, BP's bonus scheme gave little credit for achieving
good health and safety, and WorldCom's CEO's remuneration package focused
myopically on quick profits and share prices. Excessive compensation not aligned with
performance was a flaw in Vivendi.
●​ Information "Glass Ceiling": This occurs when internal control mechanisms, like
internal audit or risk management, are unable to report risks originating from higher
levels of management. In WorldCom, the internal audit function was suppressed by
senior management to limit exposure. Red flags raised by internal compliance at Société
Générale over trading patterns reportedly had no effect.
●​ Auditor Failures: A recurring theme in scandals (Satyam, Enron, WorldCom, IL&FS,
BCCI, Maxwell) is the failure of auditors to detect fraud or accounting irregularities. This
can be due to a lack of auditor independence, especially when auditors provide lucrative
non-audit services. Auditors may also fail to follow proper accounting standards or rely
too heavily on information provided by management. Despite auditors being crucial
 gatekeepers, their contribution to corporate governance is sometimes overlooked. The
scandals have highlighted the need for stricter protocols for auditors.
●​ Lack of Transparency and Disclosure: Insufficient or misleading disclosure of financial
information is a key factor in many frauds. Satyam's fraud involved creating fake
financials and hiding information. Vivendi suffered from lack of transparency and
deceptive accounting. Effective corporate governance flourishes in an environment of
transparency.
●​ Conflict of Interest: Situations where the interests of those in control conflict with the
interests of the company or other stakeholders are detrimental. The Satyam case
involved the attempted takeover of a company owned by the CEO. WorldCom's CEO
received large loans from the company, creating conflicts of interest. Conflicts can arise
when auditors provide non-audit services or when proxy advisors have other consulting
roles.
●​ Excessive Risk Taking and Pursuit of Short-Term Profits: An obsessive pursuit of
short-term profit maximization and excessive risk-taking at the expense of long-term
wealth creation can lead to failure. This was a factor in Vivendi's overexpansion and
WorldCom's aggressive acquisition strategy driven by pressure to meet market
expectations and the CEO's myopic remuneration package.
●​ Weak Internal Controls: Ineffective internal control systems are often exploited in
frauds. WorldCom's internal audit function was suppressed by senior management,
rendering controls useless as information could be altered or withheld.
●​ Neglecting Stakeholder Interests: While corporate governance should balance the
interests of various stakeholders (shareholders, management, customers, suppliers,
government, community), failures often occur when management prioritizes their own
interests or only focuses on shareholders. Vijay Mallya was accused of failing fiduciary
duties to employees, shareholders, and investors.
●​ Political Interference: As seen in the Kingfisher case, political connections can
undermine sound financial practices and enable mismanagement by influencing
decisions like granting loans despite low credibility.
●​ Lack of Accountability: Insufficient accountability for top management can allow
fraudulent activities to continue. In WorldCom, there was little direct accountability on the
CEO to ensure true and fair accounts.

These common issues highlight the critical need for robust corporate governance frameworks,
independent oversight, strong ethical leadership, and effective enforcement to prevent failures
and restore public confidence.

Analysis of Cases, Gaps in Framework, and Assessment of Practices

●​ Analysis of Corporate Scams and Failures in India: The cases of Satyam, Kingfisher,
PNB, and IL&FS demonstrate a recurring pattern of governance failures rooted in issues
like fraudulent financial reporting, misuse of power, lack of transparency, conflict of
interest, and inadequate oversight by boards and auditors. These are not isolated
incidents but reflect systemic vulnerabilities. These cases confirm that while economic
growth is a means, human development and societal goals should be the ultimate
 objectives, which are often neglected when corporate governance has only a
shareholder focus.
●​ Identifying Gaps and Deficiencies in the Regulatory Framework: The scandals have
exposed gaps and deficiencies in the regulatory framework over time.
○​ The Satyam scandal highlighted the absence of provisions for class action suits
in the Companies Act, 1956, preventing Indian shareholders from easily claiming
damages, although this was later introduced in the Companies Act, 2013.
○​ Auditor failures in cases like Satyam, Enron (mentioned as context), and IL&FS
showed that the mere presence of a legal framework and auditing standards is
insufficient if auditors lack independence or fail to adhere to protocols. This led to
increased scrutiny and legal actions against auditors, as well as the
establishment of bodies like the National Financial Reporting Authority
(NFRA) to oversee auditors and enforce standards.
○​ The PNB heist, involving bypassing internal systems, suggests a need for more
robust internal controls and better integration of systems like Swift with core
banking systems.
○​ The Kingfisher case illustrated how political influence could undermine lending
norms in PSU banks, pointing to the need for stronger governance in public
sector institutions and stricter enforcement against political interference.
○​ The Companies Act, 2013 introduced several key provisions to align governance
standards with developed nations, such as composition and function of boards,
code for independent directors, auditor rotation, and the Serious Fraud
Investigation Office (SFIO). However, the persistence of scams suggests that
legislation alone is not enough; effective implementation and a 'conscious
commitment' to ethics are also crucial.
○​ Despite regulations like SEBI making corporate governance compulsory for listed
companies, non-compliance and wrong reporting persist, implying that tighter
rules or better enforcement might be needed.
●​ Assessing Corporate Governance Practices in India: The sources present a mixed
picture of corporate governance practices in India.
○​ Cases like Infosys demonstrate that good governance practices, transparency,
benchmarking against global standards, and valuing stakeholders were possible
and indeed led to recognition and success. Infosys was one of the first in India to
publish a compliance report based on CII recommendations and accepted
recommendations from committees like Kumar Mangalam Birla.
○​ However, the frequent occurrence of major scams indicates that such good
practices are not uniformly adopted across the corporate sector.
○​ The emphasis in some studies on shareholder growth as a driver for improved
governance, while others call for a shift to a multi-stakeholder focus, reflects
ongoing debates about the primary objective of corporate governance in the
Indian context.
○​ Committees formed by SEBI, like the Kumar Mangalam Birla Committee and the
Narayana Murthy Committee, and the later Uday Kotak Committee, reflect
regulatory efforts to review and improve the corporate governance code and
 practices for listed companies. Regulatory bodies like SEBI and RBI (for banks)
act as gatekeepers, formulating policies and requiring compliance to protect
stakeholders.
○​ The evolution of proxy advisory firms, partly spurred by unscrupulous corporate
governance, indicates a growing demand for independent analysis and
recommendations for shareholders to improve oversight.
●​ Critically Examining Common Corporate Governance Issues: The common issues
identified are interconnected and often create a breeding ground for fraud and failure.
Weak boards fail to oversee management effectively. Lack of transparency allows
manipulations to go undetected. Conflicts of interest lead to decisions favouring insiders
over the company's welfare. Auditor failures, sometimes linked to conflicts of interest or
lack of independence, undermine the credibility of financial reporting, which is essential
for corporate governance. Pressure for short-term results or inappropriate incentives can
override ethical considerations. The 'information glass ceiling' prevents vital warnings
from reaching the board. Ultimately, a lack of ethical leadership and commitment to core
values pervades many of these failures. Addressing these fundamental issues requires
not just more rules but a cultural shift towards integrity and accountability at all levels of
the organisation.