Biggest Corporate Governance Failures in India

Many small businesses in India have been hit hard by the global pandemic. MSMEs are unsure if they can survive the multiple crises that keep on coming. COVID-19 has brought with it an increased risk of corruption not only in the public health sector but also in the private sector. Corporate governance failures have resulted in flashy business tycoons Vijay Mallya and Lalit Modi absconding from India and the arrest of corporate heavyweights like Rana Kapoor, Chanda Kochhar and the Singh brothers.

Recovering to a business environment of fairness and integrity won’t be possible without standing #unitedagainstcorruption. The holy grail of corporate governance is not infallible. Investors have found this out the hard way when massive corporations like Jet Airways, DHFL, YES Bank, IL&FS, Kingfisher Airlines collapsed. GST and the insolvency law have been blamed, yet failure to comply with corporate governance rules and not sticking to legislation cannot be ruled out as the reasons.

Corrupt business practices

Corporate takeovers and mergers call for capital restructuring, which is a prime time for corruption. If there is no independent director on the Board, there is a chance that members might not comply strictly with the laws. The company’s takeover could be driven by a board member having vested interests in the acquisition. Rather than maximising value for the shareholders, such a move would defeat the purpose of the whole exercise and that person in question would pocket the gains.

Some companies have been known to meddle with the account books, showing book profits that haven’t yet translated into cash. This is misleading for auditors and other parties looking at the account books of the organisation.

Corporate governance failures in India

Here’s a look at how corrupt business practices led to some of the biggest corporate governance failures in India.

Tata-Mistry fallout

Cyrus Mistry was a director of Tata Sons Ltd. since 2006. The majority of shareholding was held by trusts of the Tata family. This was to ensure that the control remains with the family even when Cyrus Mistry joined. The Board frequently disagreed with the decisions of Mistry and ousted him during one such meeting. Mistry alleged that there was dominant control by the nominee directors of the trust, including Ratan Tata, who were the “shadow directors” of Tata Sons Ltd.

Mistry said that he was never provided with a free hand by the promoters to manage the company and that the promoters were stubborn regarding their own projects. He also alleged that there was no independence in the working of the independent directors. Nusli Wadia, who was an independent director was also fired for standing up for Cyrus Mistry to maintain his chairmanship in group companies. This shows the clear abuse of power by the promoters.

ICICI Bank-Videocon bribery case

The Enforcement Directorate had apprehended Deepak Kochhar in September 2020 after it filed a criminal case for money laundering basis an FIR registered by the Central Bureau of Investigation (CBI) against the Kochhars, Videocon’s Dhoot, and others.

The federal probe agency alleged that Rs. 64 crore out of a loan amount of Rs. 300 crore sanctioned by a panel of ICICI Bank headed by Chanda Kochhar (wife of Deepak Kochhar) to Videocon International Electronics Limited was wired to Nupower Renewables Pvt Ltd (NRPL) by Videocon Industries on September 8, 2009. The money was transferred a day after the disbursement of the loan. NRPL, earlier known as Nupower Renewables Limited (NRL), is owned by Deepak Kochhar.

PNB-Nirav Modi Scam

The Punjab National Bank (PNB), one of the country’s largest public-sector lenders, found itself in the middle of a Rs. 11,400 crore transaction fraud case in February 2018. The bank had detected and informed the Bombay Stock Exchange about some “fraudulent and unauthorised transactions” in one of its branches in Mumbai to the tune of $1771.69 million (approx). The CBI then received two complaints from PNB against billionaire diamantaire Nirav Modi and a jewellery company alleging fraudulent transactions worth about Rs. 11,400 crore. This was in addition to the Rs. 280 crore fraud case that Nirav Modi was already under investigation for, again filed by PNB. Modi is facing two sets of criminal proceedings. The Central Bureau of Investigation case relates to the large-scale fraud upon PNB through the fraudulent obtaining of “Letters of Understanding”, while the Enforcement Directorate is investigating the laundering of the proceeds of that fraud.

The Satyam scandal

Satyam was a public-listed company and ironically enjoying a good reputation, even winning the Golden Peacock Global Award for corporate governance at one point. However, the company colluded with auditors in fraudulent accounting practices to mislead the investors, regulators, board and other stakeholders. The scandal was unravelled when the company’s Chairman Ramalinga Raju confessed about the misrepresentation in the accounting practices and thereafter regulators like SEBI stepped in and started taking action.

The issue started with Satyam’s attempt to invest Rs. 7,000 crores in Maytas Properties and Maytas Infrastructure. These firms were owned by the family members of Raju. The investments were cleared by the board on 16th December 2008 but were opposed by the investors. The accounts of the firm were manipulated by assets like cash and bank deposits being overstated, debts being understated. As a result, the investors filed various lawsuits against Satyam.

Following the Maytas deal and subsequent lawsuits, the decision of Satyam board was reversed. The World Bank banned Satyam for 8 years to conduct any kind of business while four independent directors resigned.

The Satyam case sparked a reaction from various corners of corporate India, calling for urgent change in policy measures. Several agencies like CII (Confederation of Indian Industries), National Association of Software and Services committee, SEBI Committee on disclosure and accounting standards etc. started looking into the policy changes regarding the Audit Committee, Shareholder Rights, Whistle-blower policy etc. These committees prepared various kinds of suggestions which were later dealt with by the legislature.

Malvinder and Shivinder Singh

The now infamous Singh brothers Shivinder and Malvinder, who were under the scanner of the Economic Offence Wing (EoW) of the Delhi police for a fraudulent loan from Laxmi Vilas Bank, are accused of siphoning nearly $2 billion from their corporate empire that spanned across listed companies including pharma major Ranbaxy, hospital chain Fortis Healthcare and financial services company Religare Enterprises Ltd (REL).

Malvinder and Shivinder have been accused of diverting the money of Religare Finvest Limited (RFL), an REL subsidiary. The broad allegations are that Malvinder and Shivinder, along with other officials of REL, took loans in the name of RFL and diverted the money to other companies. This caused the company losses of Rs. 2,387 crore! These allegations against Malvinder and Shivinder Singh are just the tip of the iceberg. According to a Business Today report from 2018, the brothers inexplicably managed to squander a whopping Rs. 22,500 crore over just one decade.

In a complaint Malvinder accused his younger brother, Shivinder, the Dhillon family and Sunil Godhwani (former head of REL) of criminal conspiracy, cheating and fraud for allegedly siphoning off thousands of crores from RHC Holdings, the group’s holding company that once promoted Fortis Hospitals and Religare. Meanwhile, SEBI has accused the Singh brothers of diverting Rs. 403 crores from Fortis Healthcare to RHC.

Dewan Housing Finance Limited (DHFL)

The DHFL scandal was the biggest corporate fraud of 2019, and is still under investigation. It is a classic case of meddling with the books – that we mentioned earlier – getting the company into trouble.  In this case, the “Bandra Books” were at the centre of the massive corporate fraud which is still under investigation. The supposed Bandra branch for which a parallel set of books exist, does not exist in reality. It was a completely made up entity for the corrupt business practices to thrive.

A forensic report declared: “out of the Rs. 23,815 crores shown as disbursed to Bandra Book entities in the accounts of the Company, only Rs. 11,755.79 crores was actually disbursed” to 91 entities, but was portrayed as comprising 2,60,315 home loan accounts. In fact, when the auditor “verified some of these “91 entities”, it was found that 34 of them had invested part of the loan amount back into companies linked with DHFL. According to SEBI, if the fake income in the Bandra books is taken out, DHFL has been making losses for years on end. The fraud has allowed DHFL to raise a whipping Rs. 24,000 crores through public issue of debt securities.

YES Bank

In the absence of a credible revival plan, and in the interest of YES Bank’s depositors, the RBI (Reserve Bank of India) took control of YES Bank in March 2020. The story of YES Bank is nothing short of a John Grisham novel. It was founded as an NBFC (non-bank financial company) in 1999, and became a full-fledged bank in 2003. Its board members battled constantly for the top spot, with Former Managing Director and CEO Rana Kapoor being popular for propping up the market by agreeing to disburse loans to corporate borrowers rejected by other banks. The bank would charge a huge upfront fee and most borrowers were defaulters at will.

The financial position of Yes Bank has undergone a steady decline largely due to inability of the bank to raise capital to address potential loan losses and resultant downgrades, triggering invocation of bond covenants by investors, and withdrawal of deposits. The bank has also experienced serious governance issues and practices in recent years which have led to its steady decline. The RBI was in constant engagement with the bank’s management to find ways to strengthen its balance sheet and liquidity. The bank management had indicated to the RBI that it was in talks with various investors and they were likely to be successful.

RBI was also engaged with a few private equity firms for exploring opportunities to infuse capital as per the filing in stock exchange dated February 12, 2020. These investors did hold discussions with senior officials of RBI but for various reasons eventually did not infuse any capital. Since a bank and market-led revival is a preferred option over a regulatory restructuring, the RBI made all efforts to facilitate such a process and gave adequate opportunity to YES Bank’s management to draw up a credible revival plan, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity. It wasn’t long before the bank collapsed and RBI was forced to apply to the Central Government for imposing a moratorium on YES Bank.

Cafe Coffee Day

The coffee chain Cafe Coffee Day (which loyalists called CCD) had over 1750 outlets across the nation at one point in time. It was India’s biggest coffee chain in the 2000s. Proprieter V. Siddhartha came from a prestigious family with a 140-year history of growing coffee beans. A chat with a German coffee maker inspired him to launch Cafe Coffee Day as a rival to Starbucks right when the cafe culture had begun to brew among young people. The chain went public in 2015 and it looked like things could only get better, what with rumours of Coca Cola planning to invest a whopping 2,500 crores into the company.

However, things took a turn in September 2017 when the Income Tax (I-T) department conducted raids at over 20 locations linked to Siddhartha. He was reportedly heavily in debt. His Coffee Day Enterprises Ltd had seen net loss widening to Rs. 67.71 crore in the fiscal year ended March 31, 2018 from Rs. 22.28 crore loss in the previous year. This despite revenues climbing to 122.32 crores. He disappeared suddenly one evening in 2019.

A letter by him to the CCD Board claimed that he was being pressured by “one of the private equity partners” forcing him to buy back shares, a transaction he had partially completed six months ago by borrowing a large sum of money from “a friend”. His dead body was found 36 hours after he went missing in Mangaluru. It was apparently a case of suicide.

Evidence points to Siddhartha having taken on debt in his private capacity to buy land and invest in long gestation projects, and angry lenders hounding him for quick returns. While the 2000s decade saw the rise of Cafe Coffee Day, the period also saw debt piling up. The company needed funds for both operations and capex. In 2010, Standard Chartered Private Equity (Mauritius) II Ltd, KKR Mauritius PE Investments II Ltd, and Arduino Holdings Ltd (which later transferred the debentures to NLS Mauritius LLC) invested close to $149 million. Compulsorily convertible preference shares held by Standard Chartered Private Equity (Mauritius) II Ltd and the compulsory convertible debenture held by KKR Mauritius PE Investments II Ltd and NLS Mauritius LLC was converted into equity shares at the time of listing. By June 2015, the consolidated debt was a whopping Rs. 2,700 crore, a knot the board couldn’t wriggle out of.

Jet Airways

Jet Airways was India’s second largest airline until the year 2018 with 13.8% market share. It saw its last flight on 18th April 2019 after running out of funds to carry out operations and left more than 15,000 employees in the lurch. The company’s dues to banks are around Rs. 8,500 crores. Jet Airways owes another Rs. 25,000 crores in arrears to lessors, employees and other firms. Corporate governance failures by its Chairman Naresh Goyal are the culprits. The downfall of Jet Airways follows a string of other failed airlines including Kingfisher, Sahara and Deccan, pointing to bad corporate governance in the airline sector.

The Goyal family owned the majority share in the airline and Naresh Goyal was the Chairman of the board. A promoter-led board is often at the danger of creating a spineless board, often serving at the wish and command of the promoter-chairman. Two independent directors, Vikram Mehta Singh and Ranjan Mathai, resigned from the Board in November 2018. The decision by the board to not accept an investment offer by the Tata Group was financially imprudent as a deal would have infused capital and saved the airline. It also looks as though the decision was made with the sole interest of the promoter than the consideration of the stakeholders as well as the employees.

International Anti-Corruption Day 2020 is another chance for India Inc to pledge being united against corruption.