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Corporate Governance Case Study: Tesla, Twitter, and the Good Weed

Justin Slane, Sharon Makower and Joe Green are editors for the Capital Markets & Corporate Governance Service at Thomson Reuters Practical Law. This post is based on a Practical Law article by Mr. Slane, Ms. Makower and Mr. Green.

Perhaps no company in the world has the perception of its brand being tied to one person more than Tesla Inc. (Tesla) and its CEO and now former chairman of the board, Elon Musk. As at least one journalist phrased it, “ Elon Musk is Tesla. Tesla is Elon Musk .” And Musk is not just the face of Tesla, but a co-founder of PayPal and Solar City, the founder and current CEO of SpaceX and founder of its subsidiary, The Boring Company. He has crafted a “real-life Iron Man” persona, including all the eccentricity, and is undoubtedly one of the most recognizable and polarizing CEOs in the world.

But 2018 has not been the best year for Elon Musk. In what Musk would call negative propaganda pushed by short sellers, Tesla has faced heightened scrutiny and increasingly negative media attention related to a litany of issues, including cash burn , vehicle safety , production capabilities , and a string of employment-related lawsuits and executive exits ( only made worse recently ). Analysts and investors began to publicly cool on Tesla and question its long-term value, which Musk also attributed to short sellers .

In May, citing independence concerns and questioning whether Musk may be stretched too thin, proxy advisory giants Glass, Lewis & Company (Glass Lewis) and Institutional Shareholder Services, Inc. (ISS) opposed the re-election of current Tesla board members and supported splitting Musk’s roles as CEO and chairman.

As the pressure mounted, Musk became increasingly combative, especially on Twitter, lashing out at short sellers and anyone criticizing Tesla or him. Musk’s erratic behavior and obsession with short sellers and critics drew more criticism of his leadership and that of Tesla’s board of directors .

But it all came to a head on August 7, when in the middle of the trading day, without notice or warning to anyone (including other executives and directors at Tesla or contacts at Nasdaq, the exchange on which Tesla’s common stock is listed), Musk tweeted:

Then, for reasons still unknown, nobody took his phone away, and Musk continued tweeting and interacting with shareholders throughout the day:

The public reaction to Musk’s tweets was strong and immediate. Tesla’s stock soared before Nasdaq eventually halted trading for several hours later in the day, and there was instant speculation about whether Musk actually had the funding to take Tesla private (spoiler: he did not).

Musk’s drastic departure from normal public disclosure standards and the subsequent media circus arising from it unsurprisingly captured the attention of the Securities and Exchange Commission (SEC), which ultimately resulted in an enforcement action and settlement with Elon Musk over the tweets. Tesla also settled with the SEC. The end results of the settlements include the following:

• Musk must step down as chairman of the board and be replaced by an independent chairman, but Musk will be allowed to remain as CEO. On November 7, 2018, Tesla appointed an independent chairman.
• Musk and Tesla must each pay $20 million in fines.
• Tesla must add two independent directors and create a formal disclosure committee to oversee communications from Musk.
• Tesla must hire an experienced securities lawyer, subject to approval by the SEC Division of Enforcement (Tesla’s current general counsel was Elon Musk’s divorce attorney and worked primarily in family law before joining Tesla).

This post examines this corporate governance cautionary tale, focusing primarily on the Regulation FD (Reg FD) issues raised by Musk’s tweets and public statements. The full article from which this post is excerpted also examines a host of other issues including disclosure controls and procedures, stock exchange requirements, conflicts of interest, board independence, and more, highlighting for each issue where things went wrong and identifying resources that perhaps could have helped avoid this type of mess. To learn more about these issues, the full article can be accessed here .

Complying with Regulation FD

Much of the initial reporting surrounding Musk’s tweets questioned whether the use of his personal Twitter account violated Reg FD. Reg FD, which took effect in 2000, prohibits selective disclosure by requiring that material nonpublic information disclosed to securityholders or market professionals (including research analysts) must also be disclosed to the public in a broad, non-exclusionary manner. And in fact, in finally answering why he tweeted about taking Tesla private, Musk explained in an August 13 blog post that he wanted to have discussions with key shareholders and he felt it “wouldn’t be right to share information about going private with just [Tesla’s] largest investors.” While Musk’s intentions are noble and in line with the basic principle of nearly 20-year-old federal securities law, the reports were correct that Reg FD generally requires more than tweets.

SEC guidance issued in 2008 and 2013 regarding the use of company websites and social media for disclosure suggests that companies can still satisfy Reg FD requirements if they notify investors of where they can expect material information to be disclosed online, making it a “recognized channel of distribution.” In particular, the 2013 guidance dealt with the Netflix CEO disclosing monthly viewing hours on his personal Facebook page.

The SEC stated that disclosing material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to satisfy Regulation FD because it is not likely a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” that Reg FD requires. The SEC stated this is true even if “the individual in question has a large number of subscribers, friends or other social media contacts, so that the information is likely to reach a broader audience over time.”

The SEC used its 2013 guidance to highlight the concept that whether a Regulation FD violation occurred will turn on whether the investing public was alerted to the channels of distribution a company will use to disseminate material information. The SEC’s 2008 guidance on the use of company websites outlines the factors that indicate whether a particular channel (whether it be a corporate website or a corporate executive’s social media account) is a recognized channel of distribution for communicating with investors.

In this case, Tesla and Musk had a few factors in their favor:

• A Form 8-K filed on November 5, 2013 , encourages investors to follow Elon Musk’s personal Twitter account for material information being disclosed to the public. Ideally the notice would be repeated, including in Tesla’s annual reports on Form 10-K or additional Form 8-K reports, but at least some form of notice was provided to shareholders.
• Elon Musk also has nearly 23 million Twitter followers. His original tweet was widely picked up and further broadcast by major news sources within minutes, and within hours, former SEC Chairman Harvey Pitt was on major cable news networks discussing whether Musk committed securities fraud.

While it was far from a safe use of social media for Reg FD purposes, Musk and Tesla appear to have a decent argument that shareholders had notice that information could be disclosed through Musk’s personal Twitter account and his account was reasonably designed to provide broad, non-exclusionary disclosure of the information.

Most public companies typically adopt formal policies regarding compliance with Reg FD (as well as the use of social media by their employees and executives). A strong Reg FD policy should contain:

• A complete outline of the procedures and practices of the company concerning disclosure of information to the public.
• A formal limitation on which company personnel are permitted to communicate with analysts and securityholders on behalf of the company. These people should be well-versed in Reg FD and familiar with the company’s public disclosures. Ideally these people should also understand the concept of materiality and what may constitute securities fraud under Rule 10b-5.
• A restatement of the company’s policy on confidentiality of information.
• A guide to disclosing material information.

Companies should also address the use of social media by their employees and executives, whether in their Reg FD policies or in separate social media guidelines that cover both personal social media use and social media use as an authorized company spokesperson.

While a Tesla Reg FD policy, set of social media guidelines, or other corporate communications policy addressing these concerns does not seem to be publicly available, the Tesla Code of Business Conduct and Ethics (last revised in December 2017) refers to a “Communication Policy … [that covers] Tesla’s social media guidelines, media relations and marketing guidelines, and the circumstances and the extent to which individuals are allowed to speak on Tesla’s behalf.” Musk should have been aware of Tesla’s communications policy, ideally having been reminded frequently through regular training for Tesla officers regarding the company’s policy and their obligations under Regulation FD, and never tweeted to begin with.

Twitter Was Always a Bad Choice

Musk’s tweets are also an extreme, yet useful, example of why casual social media use and disclosure of material nonpublic information should not be mixed. Section 10(b) of the Exchange Act prohibits material misstatements and omissions of fact, and companies must always avoid making disclosures in informal social media posts that lack material information or the context necessary for investors to be fully informed. If a company decides that there is material information that should be disclosed to the public, it must then determine when that information must be disclosed. Information should only be disclosed when it is definitive, accurate, clear, and specific.

Twitter can be an excellent tool for supplementing more formal corporate disclosure, such as linking to SEC filings, the company’s website, or attaching a press release as an image. However, individual Twitter posts as the sole medium of disclosure might be the worst form of social media use for disclosing material nonpublic information. The primary differentiating factor between Twitter and other social media platforms is it limits user posts to just 280 characters. Musk used 61 characters in his original going private tweet (if you pro rate his $20 million SEC fine to the characters in that tweet, Musk spent over $2.6 million on spaces alone). While some may applaud his succinctness, Musk’s August 7 tweets and blog post are textbook examples of public disclosures that lack context and completeness.

What does “funding secured” and “investor support is confirmed” mean? Who is/are the buyer(s)? How was the $420 per share price calculated? Has the board received or approved a proposal? None of these basic questions had answers. We later learned in the SEC’s civil complaint against Musk:

• A Tesla investor texted Musk’s chief of staff “What’s Elon’s tweet about? Can’t make any sense of it….”
• A reporter emailed Musk to ask if his tweet was a 420 joke and whether “an actual explanation” was coming.
• The following investor relations exchange happened in real life seven hours, ten tweets, and one blog post after Musk’s initial “going private” tweet:

“After Tesla’s head of Investor Relations received another inquiry from another investment bank research analyst at approximately 7:20 PM EDT, he asked whether the analyst had read Tesla’s ‘official blog post on this topic.’ The analyst responded, ‘I did. Nothing on funding though?’ The head of Investor Relations replied, ‘The very first tweet simply mentioned ‘Funding secured’ which means there is a firm offer. Elon did not disclose details of who the buyer is.’ The analyst then asked, ‘Firm offer means there is a commitment letter or is this a verbal agreement?’ The head of Investor Relations responded, ‘I actually don’t know, but I would assume that given we went full-on public with this, the offer is as firm as it gets.'” (see SEC Complaint, par. 52 .)

It took six full days before Musk or Tesla provided any clarification about what Musk meant by “funding secured” and the rest of his going private tweets on August 7.

Corporate Disclosure or Personal Statements?

Musk’s claim he was making statements in his personal capacity as a potential buyer of Tesla as opposed to on Tesla’s behalf as CEO and Chairman adds another element to this case illustrating why disclosure of material nonpublic information requires full context. If his personal Twitter account is both a recognized channel for corporate communications and a means for him to make disclosures as a private individual, how are investors supposed to know what is corporate information and what is personal?

Nothing in the August 7 tweets or blog post definitively stated Musk was not speaking on behalf of Tesla as its CEO and Chairman. In fact, in the investor relations exchange mentioned above, Tesla’s head of Investor Relations says “… I would assume that given we went full-on public with this…” (emphasis added), phrasing that certainly implies he thought the statements were made on Tesla’s behalf.

It is generally good corporate governance practice that if a company discovers a Reg FD violation, to minimize risks, it should promptly disclose the information by a Reg FD-compliant method. For example, if an executive officer selectively discloses material nonpublic information, the company can correct the situation by filing a Form 8-K to disclose the information.

Given the potential confusion for investors resulting from Musk’s initial tweets and his claim that he made the statements in his “personal capacity,” Tesla should have immediately filed a Form 8-K (which also happens to allow for more than 280 characters) to correct any potentially selective or misleading disclosure made by Musk and provide any additional context necessary. No Form 8-K was filed though. Again, it was six days before Musk or Tesla provided any clarification or additional explanation for his statements on August 7.

The SEC Settlement and Ongoing Fallout

The ultimate fallout from Musk’s brief foray into a possible going private transaction is still ongoing:

• Class action lawsuits are still pending.
• The Department of Justice is still investigating Musk’s tweets.
• Significant investors are engaging with Tesla requesting changes to the board of directors (and other corporate governance practices).

Musk doesn’t seem to be fazed by any of this, and could do something tomorrow that turns this all on its head again. But the SEC settlement with Musk has now been approved by the Southern District of New York, and Tesla has settled separately with the SEC without a formal enforcement action. The terms of the settlements bring us full circle to where the year started, with the recognition that Tesla was facing an increasing battle between responsible corporate governance and Elon Musk’s persona. Tesla lost this round. If the added disclosure controls and expanded board continues losing battles, well, who knows? There is always Teslaquilla (or maybe not )!

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This Data Spotlight provides data and statistics on unethical behavior in corporations and other negative outcomes including bankruptcy, litigation, and corruption in the United States. This data supplements in the issues introduced in the Quick Guide “ Introduction to Corporate Governance .”

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Corporate Governance Failures as a Cause of Increasing Corporate Frauds in India—An Analysis

• First Online: 06 February 2021

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• Vijay Kumar Singh 3  

Part of the book series: Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application ((AFSGFTA))

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One has witnessed a rise in corporate governance failures over the past few years with cases of Vijay Mallaya , Nirav Modi and likes. Recent addition to the typology of corporate frauds are the insolvency related frauds, for e.g. the recent issue of Jaypee’s mortgage is alleged to be done fraudulently. Everyone in the corporate circle received a shock on hearing the Chanda Kochhar’s case of alleged non-compliance of corporate governance norms. While this paper was being written, we saw another major corporate governance failure leading to the IL&FS crisis, requiring the government to step in like Satyam . Corporate Governance norms have been formalised in India through specific provisions in the Companies Act, 2013 incorporating provisions relating to corporate frauds. The clause 49 of the Listing Agreement is now given a statutory by way of Listing Regulations of SEBI (LODR). At times, the corporations have not liked this tight scrutiny by the regulator and accordingly some compliances were relaxed for private companies in the Companies Act, 2013. One of the major factors which played a significant role in controlling corporate frauds was having a robust internal control mechanism and its regular testing. However, a survey by Grand Thornton in 2014 indicated that fraud risk assessment and compliance controls review was seen as a one-time exercise by most corporates and not taken that seriously subsequently. The present paper would explore whether the efforts taken under the Companies Act, 2013 and SEBI Regulations have served its purpose in decreasing the corporate frauds in India. Recently, the Government has notified the constitution of National Financial Reporting Authority (NFRA); this paper would also examine as to how NFRA would contribute in regulating the corporate frauds. Through some examples it would be explored whether the corporate governance failures are the cause for increasing corporate frauds in India.

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Agrawal A, Knoeber CR (2012) Corporate governance and firm performance. In: Thomas CR, Shughart WF II (eds) Oxford handbook in managerial economics. Oxford University Press, New York, USA, pp 491–509

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Singh, V.K. (2021). Corporate Governance Failures as a Cause of Increasing Corporate Frauds in India—An Analysis. In: Kaur, H. (eds) Facets of Corporate Governance and Corporate Social Responsibility in India. Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application. Springer, Singapore. https://doi.org/10.1007/978-981-33-4076-3_2

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Please note you do not have access to teaching notes, elucidating corporate governance’s impact and role in countering fraud.

Corporate Governance

ISSN : 1472-0701

Article publication date: 26 May 2022

Issue publication date: 12 October 2022

This paper aims to highlight the role and impact of corporate governance in combating fraud by drawing on insights from the literature, identify gaps in the literature and suggest new directions for future research.

Design/methodology/approach

The paper is based on a comprehensive general literature review using multiple search engines and databases.

This paper finds that effective corporate governance can help reduce fraud risk, prevent fraud and detect fraud, particularly corporate fraud, insider fraud and asset diversion. Some companies use corporate governance mechanisms to bolster their reputation following fraud detection. Ineffective corporate governance increases fraud risk, provides the opportunity for perpetrating fraud and reduces the likelihood of fraud detection. The paper sheds light on several governance mechanisms that could help in mitigating fraud risk, as reported in the literature. The paper categorises these governance mechanisms into four broad governance aspects, including board leadership and the role of ethics; (b) board characteristics, composition and structure; ownership structure; accountability. The paper proposes a guide summarising these broad fundamental governance aspects, including specific anti-fraud controls and examples of how organisations could enhance ethical cultures and the tone at the top.

Originality/value

To the best of the author’s knowledge, this is the first paper to elucidate the role of corporate governance in countering fraud and develop guidance in this area. The proposed guidance could be helpful to businesses leaders, policymakers, researchers and academics alike.

• Corporate governance
• Accountability
• Board leadership
• Board diversity
• Controls and risk management

Acknowledgements

Funding : This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.

Kassem, R. (2022), "Elucidating corporate governance’s impact and role in countering fraud", Corporate Governance , Vol. 22 No. 7, pp. 1523-1546. https://doi.org/10.1108/CG-08-2021-0279

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Nirav Modi: A Case Study on Banking Frauds and Corporate Governance

In August 2018, Interpol and the Indian government filed charges against Belgian businessman Nirav Deepak Modi, who is wanted for illicit breach of confidence, deceiving, and dishonesty. The charges include illegal property dealing, corruption, criminal conspiracy, money-laundering, cheating, embezzlement, and contract breaching. Nirav is under investigation in connection with Punjab National Bank's $2 billion fraud scandal, later in March 2018, he filed for bankruptcy in The United States of America. Finally, in June 2018, he was traced in the United Kingdom, where he is living by taking political asylum. Further, in June 2019, the total assets of US$6.6 million were frozen in his Swiss Bank Account. Corporate Governance initiatives were laid down by government officials and intervention by reserve Bank was seek in the case to avoid future occurrence of such fraudulent practices.

Reddy Y.R.K. “Corporate Governance and Public Enterprises: From Heuristics to an Action Agenda in the Indian Context”, The Asci Journal Of Management, Vol.27, pp.1-24, 1998

Briggs v. Spaulding, 141 U.S. 132 (1891)

Sarkar J., Sarkar S, “Large Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India”, International Review Of Finance, Vol.1, pp.161- 1945, 2000

Verghese K.C., “Best Practices for Corporate Governance IBA BULLETIN” pp. 13-15, 2002 [24] 141 U.S. 132 (1891). [25] 141 U.S. 132, 149 (1891), quoting In re Forest of Dean Coal Mining Co., 10 L.R.-Ch. 450, 451 (Rolls Court).

Basel Committee on Banking Supervision (BCBS) Enhancing Corporate Governance for Banking Organisations. Switzerland: Bank for International Settlements

Becker G., Stigler G., “Law Enforcement, Malfeasance and Compensation of Enforcers”, Journal of Legal Studies, Vol.3, pp. 1-18, 1974

Hay J.R., Shleifer A., “Private Enforcement of Public Laws: A Theory of Legal Reform”, American Economic Review. Papers And Proceedings Vol.88, pp. 398-403, 1998

Kohli S.S., “Corporate Governance in Banks: Towards Best Practices”, IBA Bulletin, pp.29-31, 2003

https://www.governancenow.com/news/regular-story/nirav-modi-why-we-need-banking-reforms

https://m.economictimes.com/news/nirav-modi/amp

https://www.thehindu.com/topic/PNB-Nirav_Modi_case/

https://www.business-standard.com/about/what-is-pnb-scam

https://www.businesstoday.in/industry/banks/story/nirav-modi-case-pnb-fraud-11400-crore-scam-ed-cbi-raid-101200-2018-02-15

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Revisiting Harshad Mehta Scandal: A Case Study in Corporate Governance & Investor Protection

“Revisiting the Harshad Mehta Scandal: A critical study on corporate governance and investor protection failures leading to regulatory reforms in India.”

In the early 1990s, Harshad Mehta, a stockbroker in Mumbai, orchestrated one of the biggest stock market scams in India’s history. His modus operandi was to use fake bank receipts to manipulate the stock prices of certain companies, leading to a surge in their share prices. He then sold those shares at inflated prices, reaping massive profits in the process. Mehta’s fraudulent activities resulted in a significant loss of investor confidence in the Indian securities market and underscored the need for stronger regulatory measures to protect investors.

The Harshad Mehta scam was a wake-up call for Indian regulators, who realized that the country’s securities market was in dire need of a regulatory overhaul. The Securities and Exchange Board of India (SEBI), the country’s securities regulator, took a number of steps to improve corporate governance and investor protection in the wake of the scandal. These measures included increasing the transparency of stock trading, strengthening insider trading regulations, and improving the disclosure requirements for listed companies.

This article revisits the Harshad Mehta scam as a case study in corporate governance and investor protection. It examines the events leading up to the scam and the regulatory and legal framework that was in place at the time. It highlights the shortcomings in corporate governance and investor protection that allowed the scam to occur and the impact of Mehta’s actions on investors and the Indian financial system.

The scam came to light when Mehta’s fraudulent activities were exposed, causing a sharp decline in the stock market, and leading to widespread panic among investors. The Indian government and regulatory authorities took various measures to investigate and punish those involved in the scam, and to prevent such incidents from happening in the future.

Now, let’s see how the Companies Act 2013 and the SEBI Act 1992 relate to this scam:

1. Companies Act 2013 : This act provides the legal framework for the incorporation, operation, and management of companies in India. The Act sets out various provisions to protect the interests of shareholders and other stakeholders, and to ensure that companies are run in a transparent and accountable manner.

In the case of the Harshad Mehta scam, the Companies Act 2013 was relevant in two ways:

1. Section 195 : Prohibition on insider trading: This section prohibits any person who is in possession of any unpublished price-sensitive information from communicating, providing or using such information to trade in securities. Insider trading is a criminal offense under the Companies Act 2013, and any person found guilty of insider trading can be punished with imprisonment and a fine.

2. Section 447 : Punishment for fraud: This section provides for punishment for fraud, which includes any act of deception or misrepresentation, with the intention to gain undue advantage or cause loss to another person. A person found guilty of fraud can be punished with imprisonment and a fine.

3. SEBI Act 1992 : The Securities and Exchange Board of India (SEBI) is the regulatory authority for the securities market in India. The SEBI Act 1992 provides the legal framework for the regulation and supervision of the securities market, to protect the interests of investors and to promote the development of the securities market.

In the case of the Harshad Mehta scam, the SEBI Act 1992 was relevant in several ways:

1. Section 12A : Power to investigate and impose penalties for market manipulation: This section empowers SEBI to investigate and impose penalties for market manipulation, including the use of fraudulent and unfair trade practices. Harshad Mehta used various illegal and unethical methods to manipulate the stock market, such as circular trading, which artificially inflated stock prices. This was a violation of the SEBI Act 1992, and SEBI could investigate and penalize those involved in such practices.

2. Section 15G : Prohibition on insider trading: This section prohibits insider trading, which is the buying or selling of securities by an insider who has access to unpublished price-sensitive information. Harshad Mehta used his position as a stockbroker to manipulate the stock prices of various companies by using insider information. This was a violation of the SEBI Act 1992, and SEBI could investigate and penalize those involved in insider trading.

3. Section 24 : Prohibition on fraudulent and unfair trade practices: This section prohibits any person from engaging in fraudulent or unfair trade practices in securities markets. Harshad Mehta used fake bank receipts to show that he had more funds than he actually had, which he then used to buy more stocks and manipulate the market further. This was a violation of the SEBI Act 1992, and SEBI could investigate and penalize those involved in such fraudulent practices.

In conclusion, the SEBI Act 1992 provided the legal framework for the regulation and supervision of the securities market, and empowered SEBI to investigate and penalize those who engaged in market manipulation, insider trading, and fraudulent and unfair trade practices. The Harshad Mehta scam highlighted the need for a strong regulatory framework to protect the interests of investors and maintain the integrity of the securities market, and led to several reforms in the Indian securities market. Harshad Mehta scam was a significant financial fraud that exposed the loopholes in the Indian securities market. The Companies Act 2013 and the SEBI Act 1992 provide the legal framework to regulate and supervise the securities market and to protect the interests of investors. The regulators have taken various measures to strengthen the regulatory framework and prevent such incidents from happening in the future.

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Corporate governance failure in ICICI Bank Ltd

This article is written by Darshee Madhukallya, pursuing Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho . The article has been edited by Tanmaya Sharma (Associate, LawSikho), Ruchika Mohapatra (Associate, LawSikho) and Indrasish Majumder (Intern at LawSikho).

This article has been published by Abanti Bose.

Table of Contents

Introduction

“Ethics in business is extremely important; your reputation is everything you have in life” -Sir Freddie Laker”. Chanda Kochhar- Ranked 32nd in Forbes List of the World’s 100 most powerful women. Haven’t we all heard the name at some point or the other? Yes, maybe? So, Chanda Kochhar is a perfect example of women empowerment in the sphere of banking. She was the CEO of India’s fourth-largest private sector bank i.e., ICICI Bank where she immensely contributed to the bank’s flourishment. However recently, the same Chanda Kochhar was in the media, alleged for her misuse of power and involvement in illegal acts. She was linked as the sole perpetrator of the ICICI Bank- Videocon Case involving Non-Performing Assets of Rs. 3,250 crores. 

To apprehend what actually happened in the ICICI Bank- Videocon case and the role of ex-CEO Chanda Kochhar in it, it is important to understand the main aspect of corporate governance that was violated in the case. To understand in simple terms, Corporate Governance (CG) is a system that talks about the way a corporate company or a bank shall work. It shows the direction in which the company wants to move and lays down rules and regulations for the same. The concept of corporate governance came into being due to the drawbacks of the corporate entity in fulfilling the needs and meeting the expectations of the creditors, customers, and investors. When these expectations are not fulfilled then it is termed as corporate governance failure of the company.

In India, there are various legislations that have formalized the principles of corporate governance through provisions in the Companies Act, 2013; Securities and Exchange Board of India (SEBI); Reserve Bank of India (RBI); Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI); etc. Various committees were also formed to study the corporate governance system. The Companies Act, 2013 introduced a very progressive and clear formal structure for corporate governance. Through new compliance rules and regulations, it enhanced compliance, transparency, and reporting but still lacked in its effectiveness. Corporate governance plays a vital role in the functioning of management of companies but it has its own downsides too as witnessed in cases like Tata-Mistry fallout, PNB-Nirav Modi Scam, The Satyam scandal, UTI scam of 2001, Dewan Housing Finance Limited (DHFL) fraud, YES Bank, Cafe Coffee Day, Jet Airways, among some. One such recent failure was in the case of ICICI Bank. The ICICI Bank fiasco had challenged the existing framework of corporate governance in the management of the bank. The ICICI Bank crisis was basically a loan controversy between Videocon Group and ICICI Bank. It occurred because of the failures of the board members and the non-disclosure of the CEO of her interest in the deal. Through this article, the writer will try to help the readers understand whether this was a scam or a media hype or was a corporate governance failure and if yes, then how the bank could have avoided the issue by taking proper steps. This case raises a question about taking steps to improve the banking sector. The article will also analyse the loopholes in the corporate governance system that requires immediate rectification.

What is corporate governance?

To understand corporate governance failure in ICICI Bank Ltd, it is important to understand the term ‘Corporate Governance’. “Corporate” means any legal business entity that exists and “Governance” means the set of frameworks or rules necessary to govern it. It is basically a structure to manage and enhance the prosperity of businesses to raise the long-term value and protect the interests of shareholders. The first case of corporate governance failure was in the case of Bank of Credit and Commerce International in 1981 in the United Kingdom. The concept of corporate governance started in India after mid-1996 when economic liberalization and deregulation of businesses and industries came into the picture. In 1996, the Confederation of Indian Industries Code (CII) started the first initiative in the Indian industry and made an essential step towards corporate governance.

Why is corporate governance required?

In the context of the banking sphere, the primary concern of corporate governance is to ensure that the interest and necessities of all its shareholders are protected. Corporate governance is required to safeguard their money so that no illegal activity takes place in the bank. It talks about Managers, Board of Directors, Shareholders, Regulators, and other related aspects. The main area of concern of corporate governance is to deal with the effective composition of the Board of Directors (BoD), the separation of the BoD’s supervisory role from the executive management, and the constitution of Board Committees to oversee critical areas, implementing value-based corporate culture and norms; ethics in the working process; accounting of transparency; etc. It is required to ensure that the use of best management practices fulfils the requirements through ethical means. It is required to implement sustainable development and ensure that the needs, liabilities, and social responsibilities of the stakeholders are fulfilled. Companies and banks opt and should opt for corporate governance to have better access to external finance, to lower their cost of interest and loans, to improve the performance, valuation, and sustainability, and most importantly, to reduce risk.

What was the ICICI Bank Ltd Case?

ICICI Bank is one of the largest private sector banks in India. Private sector banks are non-government-owned banks. The Board of Directors of the bank formed the Corporate Social Responsibility (CSR) in the year 2009. The objective of the committee was to review the CSR initiatives undertaken but a few years back the bank gathered a lot of media attention surrounding the illegitimate use of power by the CEO, Chanda Kochhar. This fiasco was termed a money laundering case.

Facts of the case

The case was initiated in 2008 with many entwined facts. The facts are summarized below:

• In the year 2008, ICICI Bank’s ex-CEO Chanda Kochhar’s husband- Mr Deepak Kochhar, and Videocon Group Chairman, Mr Venugopal Dhoot together started a company named “NuPower Renewable Private Limited” (NRPL) where they had equal stakes. 
• In 2009, Mr Dhoot sold it to Mr Kochhar. In the same year, “Supreme Energy” was incorporated with Mr Venugopal Dhoot and Mr Vasant Kakade as directors. 
• The loan transactions started when Chanda Kochhar became the CEO of the bank and sanctioned 6 loans to Videocon Group: Rs. 175 crores and Rs. 300 crores in 2009; Rs. 240 crores and Rs. 110 crores in 2010; and Rs. 300 crores and Rs. 750 crores in 2011. 
• In 2012, Rs. 1,730 crores was declared  as NPA causing a big loss to the bank.
• In 2010, “NuPower” was in need of money and hence got a loan of Rs. 64 crores from “Supreme Energy” which was Mr Dhoot’s company under the condition that Mr Dhoot would get some shares of “NuPower”. 
• In 2011, “Supreme Energy” transferred its shares to its partner- Mr Mahesh Chandra Punglia. 
• In 2012, Mr Punglia gave all the shares to a company named “Pinnacle Energy” which was owned by Mr Kochhar, for a sum of meagre 9 lakhs. 
• In April 2012, ICICI Bank made a loan of ₹3,250 crores to the Videocon group. Until this time, there were no conflicts but the problem arose in 2017 when Rs, 2,810 crores were declared as Non-Performing Assets (NPA) and the fact that Ms Kochhar was at that time the bank’s CEO. Loans which the bank considers to be not returned are called as NPAs. 

The Chairman of ICICI Bank, M.K Singh said that the bank was a part of the 20 banks consortium that gave Rs. 40,000 crore loans to the Videocon Group Chairman- Mr Venugopal Dhoot when he demanded it. In 2016, investor Arvind Gupta, a stakeholder activist, alleged that there was a deal between the CEO Chanda Kochhar’s immediate family members and the Videocon group regarding Rs. 3,250 crore loan from the former by the latter. Even before the CBI could probe into the matter, he wrote a letter to the Prime Minister in 2016 and explained the internal dealing where a private sector bank was at loss and stated how Ms Kochhar’s husband had a business partnership with the Videocon group prior to the sanction of the ICICI loan.

When the conflict started getting attention in the public domain then the chairman of the Board of Directors, M.K. Sharma, inquired into it for two years but found nothing. It was alleged that the bank disbursed only a part of the Rs 3,250 crore. Media houses reported that Videocon was provided financial favour by Ms Kochhar and the bank gave Rs. 3,250 crore to Mr Dhoot in exchange that “Supreme Energy” was given to Mr Kochhar. The case finally came into the spotlight in March 2018 when another whistleblower complained against the bank’s top management. He alleged that there was a delay in recognising the impairment of loan accounts between 2008 and 2016. 

Issues raised

After understanding the facts of the case, certain questions arise on money laundering and mismanagement by the bank. Economists, media houses, stakeholders, and shareholders raised questions pertaining to the corporate governance of the bank. 

• Even after the bank was aware of the conflict of interest that took place in the case, the bank stood by its CEO for over two months and when they saw agitation growing, then the board opted for a probe. Why did the bank not raise questions in this matter too? 
• The second question that arises is that, even though a probe was initiated, it was by an outsider. It is important to understand why an outsider had to do the same, overshadowing the fact that it was an internal failure where the bank should have been prompt in taking steps?
• While the inquiry of the case was still continuing, the CEO continued her work in the office during the period of the inquiry. To what extent is this even justified? 
• When the Securities Exchange Board of India (SEBI) initiated the probe then Mrs Kochhar requested early retirement. So, a question arises now. Why did she opt for early retirement instead of resigning and why in the first place did she even take this step?
• Other issues were raised such as whether the bank had failed to make adequate disclosures about its dealings with the borrower. Also, the review process was done by the bank internally and the report too was never made public. What was the reason behind such a process and non-disclosure?

Despite all the allegations and investigation initiated and conducted, the ICICI Bank Chairman, M K Sharma, issued a statement stating that these rumours were being spread to malign the reputation of the bank and its top management officials. Neither did they reassure on taking measures to ensure higher standards of governance in the future nor had they shown any deleterious effects on the bank because of the conflict of interest and how they would halt it. As soon as they became aware of the relation, they should have tried to protect the bank’s reputation and practices but instead, they supported the CEO. These actions on part of the bank wholly point to the non-adherence to corporate governance norms. Sharma defended the loan sanctioned to the debt-laden company, saying that the ICICI Bank’s Board had reviewed the internal processes and details of the exposure to the group. But the bank too later initiated an independent probe into the matter in the wake of rising pressure.

Actions initiated

The CBI initiated an inquiry to probe the irregularities between Mr Kochhar and Mr Dhoot. It also initiated an investigation against Deepak Kochhar’s sibling Rajiv Kochhar. In 2018, the Serious Fraud Investigation Office (SFIO) got involved in the case seeking permission from the Ministry of Corporate Affairs (MCA) to launch a probe. The SEBI also initiated legal proceedings that they were not informed of the same and demanded an explanation regarding the lender’s dealing with Videocon Group and NuPower Renewable and issued a show-cause notice before July 5, 2018. 

It suspected a violation of listing agreement disclosures and asked the CEO Chanda Kochhar to respond to the allegations who later, in October 2019, gave a plea to have early retirement which was later accepted. The bank also faced a penalty of up to Rs. 25 crores under the relevant SEBI regulations and a fine was levied along with other penal action. The penalty amount was decided on the basis of the loss suffered by the investor and the benefit that was derived by the applicant. The Enforcement Directorate (ED) also filed a recovery suit of Rs. 12 crores. It also found out that the Videocon Group had transferred a flat to a family trust of Chanda Kochhar where Mr Dhoot threatened to turn the assets to NPA.

In 2018, the bank appointed Justice B.N Srikrishna as head of an independent panel to look into the matter. In the same year, a Judicial Committee was also formed under the leadership of Justice Srikrishna, who, in 2019, said that the code of conduct was violated and cheating and criminal conspiracy were committed. After this, the bank decided to take back all benefits provided to Mrs Kochhar. The ED alleged that out of the Rs. 300 crore that was sanctioned, Rs. 64 crores were given by the committee only that was transferred by Videocon to NuPower in 2009. It also investigated other loans sanctioned by the CEO in the case of Bhushan Steel, Essar Steel, Sterling Biotech.

Mrs Kochhar also didn’t stay silent on the matter and filed a suit on the basis that even though she has already given the resignation letter, her contract was still terminated which went against the approval procedure and statutory obligation. The bank then responded by stating that the termination was done on the basis of the non-disclosure of facts by the CEO herself. Also, the Bombay High Court rejected the petition as not maintainable. Another interesting fact also came into play when Mr Dhoot stated that the CEO asked him to invest in NuPower and stated that 64 crores of the 3000 crores were given to it.

Charges filed against the parties

On January 24, 2019, the CBI also registered a First Information Report (FIR) against Chanda Kochhar, her husband Deepak Kochhar, and Videocon Group Chairman Venugopal Dhoot over the irregularities in sanctioned loans. FIRs were filed for illegal gratification between related persons, illegal use of position and power by the CEO, etc. The Enforcement Directorate (ED) charged Mr and Mrs Kochhar under Section 3 and 4 of the Prevention of Money Laundering Act (PMLA) with money laundering charges based on the CBI Report. They also seized the houses of Mrs Kochhar. They were also probed by other revenue and law enforcement agencies for granting the loan by contravening the policies of the bank and the ethics of corporate governance. In January 2020, the ED attached assets worth more than Rs. 75 crores belonging to Chanda Kochhar and her family. Mr Kochhar was arrested by the ED in September 2020 under the PMLA. Regarding the criminal case registered by the ED against Deepak Kochhar, Justice P.D. Naik of the Bombay High Court granted bail to him on merits when he had approached the high court after a special court in the city rejected his bail. Later, Mr Dhoot and Mrs Chanda Kochhar were granted bail under the PMLA special court.

Aspects of corporate governance that were disregarded in this case

Good corporate governance balances each aspect. It leads to the success of the company/bank. There are certain features of corporate governance that the banking sector should abide by. Some of these include:

• Corporate Discipline : The word governance itself refers to the word discipline. Corporate discipline refers to the proper following of the principles and procedures established for governance. 
• Balancing Interest: Corporate governance strives to balance the interest between the management of the bank, the Board of Directors, Independent Directors, Chief Executive Officer, Shareholders, Investors, Auditors, and every related person to the bank. 
• Transparency and Fairness : The existence of transparency in order to know about the internal happenings of the bank and not just relying on the given reports and documents by the auditors is essential. Every mechanism should be transparent to the extent possible. The absence of this might lead to scandals as seen in the case. It ensures that works are completed and done in a timely manner. Clause 49 of the SEBI Listing Agreement provides for it. 
• Risk Management: As recommended by the Narayan Murthy Committee in 2003, it means laying down procedures for risk management and prevention procedures by the board of the bank. 
• Integrity and Ethics: As recommended by the Naresh Chandra Committee, the bank shall abide by the rules and maintain integrity and ethics. The board shall protect the rights of the shareholders which means avoidance of any unfair practice and corruption. It shall review the management process to ensure that ethical means have been adopted in the process. In good governance, the board shall act honestly, ethically, and morally. 
• Independent Working Mechanism : Corporate governance should be free from dominance. It should have an independent working mechanism that divides the power, roles, and responsibilities between the Board of Directors, Auditors, committees of the Board, and Parties.
• Accountability : The accountability of the bank, especially the CEO and the Board of Directors in taking decisions and making other appointments, as well as sanctions of loans to parties, should be emphasized. This is important so that the investors can be cognisant of the actions taken by the bank making the bank answerable.
• Responsibility of the Bank : The responsibility of the bank should be strictly adhered to for preventing mismanagement and corruption actions. Although accountability and responsibility sound the same, there exists a thin line of difference.  Accountability refers to the answerability of the bank for actions that they have committed whereas responsibility refers to the proper carrying out of the work by the bank.
• Powers to the CEO: Another important aspect of corporate governance is giving more powers to the CEO in order to strategize independently and oversee the management of the bank properly.  

All these aspects of corporate governance failed in the ICICI Bank-Videocon Case. It clearly showed how corporate governance has failed in such a large private sector bank. The conflict between the bank and the CEO should not have taken place in the first place and the board should have been more careful in this regard by keeping a check on the management. The bank violated the basic principle of corporate governance, failed in maintaining transparency, responsibility, fairness, accountability, and balancing of interest, and; the CEO failed in abiding by the ethics and revealing the conflict of interest.  

When Mrs Chanda Kochhar gave the loan to Mr Dhoot in 2012, she did not inform the bank about her relation with the said party which she should have informed beforehand in order to maintain transparency. Even after the loan amount was declared as NPA, she didn’t inform the bank board and the committee about her husband’s business associations with the Videocon group, which was a customer of the bank. This clearly indicates that she committed a violation of bank guidelines and something might have been wrong in the complete transaction. She kept on being a part of the advisory groups that sanctioned credit facilities to Videocon when she should have separated herself on the basis of conflict of interest. This indicates that there might have been some violation of the management and procedural norms. 

Hiding this conflict of interest was wrong and she should have distanced herself instead. These questions were raised because the way the loans were provided was different. One company out of the 5 companies that received loans in the Videocon group, was Evans Fraser &  Company India Limited which received a loan of Rs. 650 crores which were nine times its total sales. Also, it was a co-obligor to the ICICI Bank in 2012 with the only net sales and net profit of Rs. 75 crores and 94 lakhs respectively. Interestingly, the committee that passed this loan had Mrs Chanda Kochhar also. The bank argued that it was merely a coincidence.  Also, the fact that she was not the head but just a member of the committee takes the suspicion in another direction. The presence of the bank’s CEO on this committee and the support of an independent probe have created doubts over corporate governance practices. For successful corporate governance, the role of the CEO and the Board is of the very essence. However,  here both the management officials failed. The Board is ultimately responsible for every bad and good action and such actions and behaviour should be strictly monitored.

There might also have been certain other underlying reasons for this failure. Mrs Kochhar already had a charismatic personality and it might be due to this that her decision if it was, was not questioned by the Board. Since the CEO’s husband already had a business relation with Mr Venugopal Dhoot, thus she should be kept far away from this. But also, the fact that there were other members too in the committee can’t be neglected. This surely sparks doubts. Also, the Board largely depends on the decisions and views of the CEO of the bank. Here too this might have been the case. 

Turning loans into NPAs takes place in public sector banks too and Economist Arvind Panagariya stated that these banks should be privatized as these banks (except SBI) are neither profitable nor can govern and be administered on their own. Will this prove to be a beneficial solution? But ICICI Bank is a private sector bank and still, such an incident took place. When this question was raised to the then Finance Minister, Arun Jaitley, he responded by saying that it’s a challenging decision to privatize it as it requires political consensus as well as changes in the Banking Regulation Act. However, it is important to analyse the authenticity and practicality of the statement. The ICICI Bank board has clearly failed in its main fiduciary responsibility of protecting investor interest. What is done cannot be undone but it can surely be prevented in the future. This case highlighted the importance of a whistleblower and the loopholes underlying the veil of corporate governance.

What is the current situation of corporate governance in India?

The Indian Board of Directors is found to be incompetent when it comes to exercising requisite due diligence to shareholders by maintaining an intense oversight of officials like the CEOs and the promoters. The reality today is that the actual practices are tailored to the needs of management officials. In India, the problem is that the officials are even spared from the aftermath of corporate governance violations. We thus need more laws and regulations to punish them. Corporate governance does not protect the stakeholders nor does it address issues like nepotism, favouritism, conflict-of-interest, lack of transparency and accountability, etc. It should focus on maintaining comprehensive compliance with the laws, rules, and regulations that govern our business promoting a culture of accountability, transparency, and ethical conduct, and making changes in the laws along with time. There should be efforts to improve the risk management and internal controls that would lead to fruitful results in a future scenario. Rules exist at their own place, but corporate governance should be done based more on principles. The bank must effectively be able to protect the interest of related party transactions.

The case was heavily criticized by the public, especially the shareholders, because of the fact that the amount that was granted to Mr Dhoot was ultimately the money of the shareholders that they have kept in the bank and the amount getting NPA indicates that the money of the shareholders is lost. Separating the roles of the CEO and other officials could be a strategic step to quell the conflict. Recently we can see that corporate governance failure has been a growing issue and more cohesive actions should be taken to address the issue. It seems that the bank has wilfully given the money without taking into consideration the principle and rules that they need to follow and adhere to. Management makes a bank run but governance ensures that it is run properly. The effectiveness of corporate governance should be ensured and kept in check. Not denying the fact that the bank had a strong consumer franchise, but the reputation of the bank was in tatters after the case. The case sparks a doubt if such instances have taken place in the past too but due to the whistleblower in this incident, the facts and mismanagement of the bank came into the public’s knowledge of the public. The same situation can be seen in several other Indian companies that are dominated by professionals rather than promoters.

Corporate governance can be understood as the relationship between the shareholders, stakeholders, and the employees of a company. Through the discussions in the article, we have seen how the functioning of corporate governance has failed despite the existence of various legislations governing it. This case has been a perfect example of how internal management can at times be harmful to the interest of the other parties. Despite the introduction of the Companies Act 2013, there have been corporate governance failures. There is a requirement for amending the law related to the Companies Act 2013 to reduce the number of corporate governance failures. It highlights the need for regulators to keep up a strong vigil on the functions of corporate boards in a period of corporate mis-administration.

Recently, private sector banks have started laying emphasis on better and more effective corporate governance. It’s a curious case of executives and top-level management laundering the money for themselves at the cost of the shareholders who put in their hard-earned money, and all of this happening in the absence of a majority promoter. In any case, if the loan, its conditions, or if the arrangement was supported, the deal clearly has a serious conflict of interest. This sort of a deal should have been immediately red-flagged. Every board meeting should include a serious review of concerns about the CEO since it’s ultimately up to board members to oversee and prevent long-term damage to the company.

It can be said that privatization won’t be a feasible and beneficial solution because the bank would be ultimately run by the people whose duties and actions go unchecked therefore coaxing corruption. To make the banking sector more transparent, measures can be taken to reduce conflict of interest. What can be done is that proper voting should be taken into account which would ensure if any directors have disagreed or agreed to the proposal and based on which further investigation shall be done. It must ensure that the internal control mechanism is properly structured and the rights of the shareholders are not trampled upon. 

• https://www.iasparliament.com/current-affairs/failure-of-corporate-governance-icici-case-study
• https://www-moneycontrol-com.cdn.ampproject.org/v/s/www.moneycontrol.com/news/business/comment-icici-a-board-that-failed-2631531.html/amp?amp_js_v=a6&amp_gsa=1&usqp=mq331AQKKAFQArABIIACAw%3D%3D#aoh=16376018902382&amp_ct=1637602092495&referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s&ampshare=https%3A%2F%2Fwww.moneycontrol.com%2Fnews%2Fbusiness%2Fcomment-icici-a-board-that-failed-2631531.html
• https://thecsrjournal.in/corporate-governance-failures-india/
• https://www.mondaq.com/india/shareholders/456460/corporate-governance-framework-in-india
• https://www.cribfb.com/journal/index.php/ijafr/article/view/1059

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• Contemporary Legal Issue

Satyam Scandal: The biggest issue revolving around Corporate Governance

• April 23, 2020
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Charu singhal | Bharati Vidyapeeth University | 25th October 2019

Table of Contents

INTRODUCTION :

Till about two decades ago Corporate Governance was relatively an unknown subject. The subject came into prominence in the late 80’s and early 90’s when the corporate sector in many countries was surrounded with problems of questionable corporate policies or unethical practices. Junk Bond fiasco of USA and failure of Maxwell, BCCI and Poly peck in UK resulted in the beginning of codes and standards on corporate governance. The USA, UK and number of other developed countries reacted strongly to the corporate failures therefore codes & standards on corporate governance came to the centre stage. Enron debacle in 2001 and number of other scandals involving large US companies such as the Tyco, Quest, Global Crossings Com and the exposure of auditing lacunae, which led to the collapse of the Andersen, triggered the reform process and resulted in the passing of the  Public Accounting Reform and Investor Protection Act of 2002 known as Sarbanes- Oxley (SOX) Act, 2002 in USA .

Fraudulent financial reporting practices and accounting frauds have occurred in all eras, in all countries, and affected many organizations, regardless of their size, location or industry. It can have significant consequences for organizations and all stakeholders as well as for public confidence in the capital and security markets. In fact comprehensive, accurate and reliable financial reporting is the bedrock upon which our markets are based. It can include the deliberate falsification of underlying accounting records, intentionally breaching an accounting standard, or knowingly omitting transactions or required disclosures in the Financial Statement. Thus, Financial Reporting Fraud- an intentional, material misrepresentation of a company’s financial statements remains a serious concern for investors and other capital market stakeholders.  

CORPORATE GOVERNANCE:

It is typically perceived as dealing with the problems that result from the separation of leadership and control. Corporate Governance may be defined as holding a balance between economic and social goals and between individual and commercial goals. Good corporate governance is one where a firm commits and adopts ethical practices across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators and shareholders in both good and bad times.

BACKGROUND:

On 24th June 1987, Satyam Computer Services Ltd (Popularly known as Satyam) was incorporated by the two brothers, B Rama Raju and B Ramalinga Raju [1] , as a private limited company with just 20 employees for providing software development and consultancy services to large corporations (the company got converted into public in 1991). It has its headquarters at Hyderabad. During the year 1996, company promoted four subsidiaries including Satyam Renaissance Consulting Ltd, Satyam Enterprise Solutions Pvt. Ltd., and Satyam Infoway Pvt. Ltd. Satyam Computer Services Ltd in 1997 was selected by the Switzerland-based World Economic Forum and World Link Magazine as one of India’s most remarkable and rapidly growing entrepreneurial companies. Satyam Infoway (Sify), a wholly owned subsidiary of Satyam Computer Services Ltd, was the first Indian Internet Company listed on NASDAQ. Mr. B. Ramalinga Raju, Chairman of Satyam, was awarded the IT Man of the Year 2000 Award by Dataquest.

In 2001, Satyam became world’s first ISO Company to be certified by BVQI. In 2003, Satyam started providing IT services to World Bank and signed up a long term contract with it. In 2005, Satyam was ranked 3rd in Corporate Governance Survey by Global Institutional Investors. But all this fame and growth was short lived as the company discovered a major setback.

SATYAM SCAM:

Scandals are often the “tip of the iceberg”. They represent the ‘visible’ catastrophic failures. An attempt is made in this case study to  examine in- depth and analyze India’s Enron, Satyam Computer’s “creative- accounting” scandal . Their scandal/fraud has put a big question mark on the entire corporate governance system in India. In public companies, this type of ‘creative’ accounting leading to fraud and investigations are, therefore, launched by the various governmental oversight agencies. 

The Satyam Scam has never been an easy issue to look upon. It has its own complexities as the very issue involves a scam of around  14000 Crore . The Satyam Scam is still regarded as an example for following poor corporate governance practices. The relationship between the shareholders and employees which is the very crux of every corporate organization has never been satisfactory.  

So, to throw light on the poor governance policies of one of the major IT giants the need to go through this case study is quite vital. The Satyam Scandal basically highlights the importance of Securities Law and Corporate Governance in emerging markets.

Problems in Satyam begin when on December 16’ 2008; its chairman Mr Ramalinga Raju, in a surprise move announced a $1.6 billion bid for two Maytas companies i.e. Maytas Infrastructure Ltd and Maytas Properties Ltd saying he wanted to deploy the cash available for the benefit of investors. It planned to acquire 100% and 50% stakes in Maytas property and infra for $1.6 Billion. The two companies have been promoted and controlled by Raju’s family. The thumbs down given by investors and the market forced him to retreat within 12 hours [2] . Share prices plunges by 55% on concerns about Satyam’s corporate governance [3] . Questions were raised on the corporate governance practices of Satyam with analysts and investors questioning the company’s board on the reasons for giving consent for the acquisition as it was related to party transaction.

In a surprise move, the World Bank announced on December 23, 2008 that Satyam has been barred from business with World Bank [4]   for eight years for providing Bank staff with “improper benefits” and charged with data theft and bribing the staff. [5]  Share prices fell another 14% to the lowest in over 4 years. 

After the deal was aborted, four of the prominent independent directors resigned from the board of the company. The lone independent director since 1991, US academician Mangalam Srinivasan, announced resignation followed by the resignation of three more independent directors on December 28 i.e. Vinod K Dham (famously known as father of the Pentium and an ex Intel employee), M Rammohan Rao (Dean of the renowned Indian School of Business) and Krishna Palepu (professor at Harvard Business School) [6] .

At last, on January 7’ 2009, B. Ramalinga Raju announced confession of over Rs. 7800 crore financial fraud and he resigned as chairman of Satyam. He revealed in his letter that his attempt to buy Maytas companies was his last attempt to “fill fictitious assets with real ones”. He admitted in his letter, “It was like riding a tiger without knowing how to get off without being eaten”. [7]

Satyam’s promoters, two brothers B Ramalinga Raju and B Rama Raju were arrested by the State of Andhra Pradesh police and the Central government took control of the tainted company [8] . The Raju brothers were booked for criminal breach of trust, cheating, criminal conspiracy and forgery under the Indian Penal Code. The Central Government reconstituted Satyam’s board that included three-members, HDFC Chairman Deepak Parekh, Ex Nasscom chairman and IT expert Kiran Karnik and former SEBI member C Achuthan. The Central Government added three more directors to the reconstituted Board i.e., CII chief mentor Tarun Das, former president of the Institute for Chartered Accountants (ICAI) TN Manoharan and LIC’s S Balakrishnan.

A week after Satyam founder B Ramalinga Raju’s scandalous confession, Satyam’s auditors Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong financial statements provided by the Satyam’s management [9] . On January 22, 2009, Satyam’s CFO Srinivas Vadlamani confessed to having inflated the number of employees by 10,000. He told CID officials interrogating him that this helped in drawing around Rs 20 crore per month from the related but 3 fictitious salary accounts. 

Andhra Pradesh State CID raided the house of Suryanarayana Raju, the youngest sibling of Ramalinga Raju who owned 4.3 per cent in Maytas Infra, and recovered 112 sale deeds of different land purchases and development agreements [10] . Senior partners S Gopalakrishnan and Srinivas Talluri of the auditing firm Pricewaterhouse Coopers (PwC) were arrested for their alleged role in the Satyam scandal.  The State’s CID police booked them, on charges of fraud (Section 420 of the IPC) and criminal conspiracy (Section 120B) [11] .

Merely four months after its founder B. Ramalinga Raju admitted to fudging the books, Satyam’s government appointee six-member board managed to salvage the company despite all odds. The board, which kicked off the global competitive bidding process [12]  in March 2009, selected Venturbay Consultants, a subsidiary of Tech Mahindra, as it emerged as the highest bidder [13]  at rupees 58 per share. The deal got the approval of Company Law Board [14] .

Consequently, Tech Mahindra (holding 31% stake in Satyam) bought Satyam renaming it on June 21, 2009, as ‘Mahindra Satyam’ [15]  and replaced its executive Board by appointing its (Tech Mahindra) CEO and MD Vineet Nayyar as ViceChairman (who in December 2009 was promoted as Chairman), its international operations head CP Gurnani as CEO. The executive Board appointed Deloitte Haskins & Sells as the company’s statutory auditors to restate its accounts.

CORPORATE GOVERNANCE ISSUES:

On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of corporate governance [16] . The Satyam scam had been the example for following “poor” Corporate Governance practices. It had failed to show good relation with the shareholders and employees. Corporate Governance issue at Satyam arose because of non-fulfillment of obligation of the company towards the various stakeholders. If we talk specifically the following interests need to be taken care of: distinguishing the roles of board and management; separation of the roles of the CEO and chairman; appointment to the board; directors and executive compensation; protection of shareholders rights and their executives.

• It is well known that a shareholder has a right to get information from the organization; such information could be with respect to the merger and acquisition. Shareholders expect transparent dealing in an organization. They even have right to get the financial reporting and records.   In the case of satyam, the above obligations were never fulfilled. The acquisition of maytas infrastructure and properties were announced, without the consent of shareholders. They were even provided with false inflated financial reports. The shareholders were cheated.
• The collapse of any organization’s reputation has adverse impact on the employee’s job. As per the instant case, employees were shown with an inflated figure. The excess of employees in the organization were kept under VIRTUAL POOL who received just 60% of their salaries and several were removed.  The entire scam had its impact on management. Questions were raised over the credibility of management.
• Any organization has its obligation towards the Government by means of timely payment of taxes and abiding by the rules and laws framed up by the Government. As per the instant case,  the company did not pay advance tax for the financial year 2009. As per the rule, the advance taxes to be paid were 4 times in a year; such was not fulfilled by them.  
• Despite the shareholders not being taken into confidence, the directors went ahead with the management’s decision.
• The government too is equally guilty in not having managed to save the shareholders, the employees and some clients of the company from losing heavily.
• Simple manipulation of revenues and earnings.
• Operating profits were artificially boosted from the actual Rs. 61crore to Rs. 649crore. Its financial statements for years were totally false and cooked up.
• Satyam Computer Consultancy Ltd. didn’t have good relationship with the bank too . The company as stated in the facts was blacklisted by World Bank over charges of Bribery. It was declared ineligible for contracts for providing:
• improper benefit to bank staff.
• failing to maintain documentation to support fees.

Near about six years after the Rs. 7,123crore Satyam Computer Services financial fraud rocked the nation; founder B Ramalinga Raju and his brother Rama Raju (former Managing Director) have been sentenced to seven years jail and fined Rs. 5 crore each.

The special court trying the case imposed a similar sentence on eight others charged by the Central Bureau of Investigation for a number of criminal offences, including criminal breach of trust, fudging, forgery, cheating, impersonation and destruction of evidence. The eight are Vadlamani Srinivas (former CFO), S Gopalakrishnan (Pricewaterhouse Partner), Talluri Srinivas (Pricewaterhouse Partner), B Suryanarayana Raju, G Ramakrishna, G Venkatapathi Raju, Ch Srisailam and VSP Gupta (all former Satyam staff). Following the judgment, all the 10 convicts were shifted to the high-security prison at Cherlapally, outside Hyderabad. 

In 2014, capital market regulator Securities and Exchange Board of India had imposed a fine of Rs. 1,850 crore on the Raju’s for making unlawful gains and barred them from entering the financial market for 14 years. A local court’s Economic Offences Wing also fined them Rs. 10 lakh and sentenced them to a jail for a term of six months for financial irregularities.

Additional Chief Metropolitan Judge BVLN Chakravarthi  delivered the judgment on  Thursday , completing the five-year trial in the special court. The court was formed by the Andhra Pradesh High Court and entrusted with all the cases related to the scam. The media was not allowed inside the court hall. Eventually, the biggest corporate fraud in recent times forced the government and SEBI to bring in a slew of measures to improve corporate governance.

LESSONS LEARNED FORM THE CASE:

The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed corporate leader. As the fallout continues, and the effects were felt throughout the global economy, the prevailing hope is that some good can come from the scandal in terms of lessons learned [17] .Here are some lessons learned from the Satyam Scandal: 

• Investigate all Inaccuracies:  The fraud scheme at Satyam started very small, eventually growing into $276 million. Indeed, a lot of fraud schemes initially start out small, with the perpetrator thinking that small changes here and there would not make a big difference, and is less likely to be detected. This sends a message to a lot of companies: if your accounts are not balancing, or if something seems inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds. 
•   Ruined Reputations:  Fraud does not just look bad on a company; it looks bad on the whole industry as well as the country. “India’s biggest corporate scandal in memory threatens future foreign investment flows into Asia’s third largest economy and casts a cloud over growth in its once-booming outsourcing sector. The news sent Indian equity markets into a tail-spin, with Bombay’s main benchmark index tumbling 7.3% and the Indian rupee fell”. Now, because of the Satyam scandal, Indian rivals will come under greater scrutiny by the regulators, investors and customers. 
•   Corporate Governance Needs to Be Stronger:  The Satyam case is just another example supporting the need for stronger Corporate Governance. All public-companies must be careful when selecting executives and top-level managers. These are the people who set the tone for the company: if there is corruption at the top, it is bound to trickle-down. Also, separate the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid situations like the one at Satyam. The fraud committed by the founders of Satyam is a testament to the fact that “the science of conduct” is swayed in large by human greed, ambition, and hunger for power, money, fame and glory.

CONCLUSION:

Recent corporate frauds and the outcry for transparency and honesty in reporting have given rise to two outcomes. First, forensic accounting skills have become very crucial in untangling the complicated accounting maneuvers that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed Corporate Governance scenario across the globe.

The Satyam fraud has shattered the dreams of different categories of investors, shocked the government and regulators alike and led to questioning of the accounting practices of statutory auditors and corporate governance norms in India. Severe corporate governance problems emerge out of the above-mentioned corporate wreckage. Many of these governance problems were noticed in several other such corporate failures in USA, UK and Europe. These countries reacted strongly to the corporate failures and codes & standards on corporate governance came to the centre stage.

In addition, the Corporate Governance framework needs to be first of all strengthened and then implemented in “letter as well as in right spirit”. Even though corporate governance mechanisms cannot prevent unethical activity by top management completely, but they can at least act as a means of detecting such activity before it is too late. When an apple is rotten there is no cure, but at least the rotten apple can be removed before the infection spreads and infects the whole basket. [18]  This is really what effective governance is about.

[1]  India Today (New Delhi), January 26’ 2009, p 43

[2]  The Pioneer (New Delhi), January 11’2009, p 1

[3]  India Today (New Delhi), January 26’2009, p 43

[4]  The World Bank is now having a relook at the ban imposed on the Mahindra Satyam when it was under the Raju’s family. Satyam requested for lifting the ban. (Economic Times, New Delhi, May 06’ 2010, P 21)

[5]  Economic Times (New Delhi) , December 24, 2009, p1

[6]  Economic Times (New Delhi), December 30, 2009, p1

[7]  Economic Times (New Delhi), January 8’ 2009, p 1.

[8] http://economictimes.indiatimes.com/Satyams_Raju_brothers_arrested_by_AP_Police/rssarticleshow/3957655.cms

[9]  Times of India (New Delhi), January 25’ 2009, p 1

[10]  http://economictimes.indiatimes.com/articleshow/4084919.cms

[11]  Times Of India (Delhi), January 25’ 2009, p 1

[12]  On February 19’ 2009, the Company Law Board (CLB) had given nod to Satyam board to get a new owner through the process of open auction and authorized it to make a preferential allotment of shares at par or at premium without the need of calling an AGM. (Pioneer, February 20, 2009, p 10)

[13]  The marquee list of bidders included engineering firm L&T, billionaire investor Wilbur Ross, IT services firm Tech Mahindra, B.K. Modi promoted Spice Group and IT services firm Cognizant Technologies. (Economic Times (New Delhi), August 31, 2009, p 6)

[14]  India Today, April 27, 2009, p 46

[15]  Mahindra Satyam is the new name given to Satyam Computer Services Ltd having its registered office at 1st floor Mayfair Centre, S.P. Road, Secunderabad, Hyderabad, India.

[16]  R. Chakrabarti, W. Megginson and P. K. Yadav, “Corporate Governance in India,” Journal of Applied Corporate Finance, Vol. 20, 2008, p 59-78

[17]  B. Behan, “Governance Lessons from India’s Satyam,” Business Week, 16 January 2009.

[18]  Jim Solomon and Aris Solomon (2004), “Corporate Governance and Accountability”, John Wiley & Sons Ltd, England, page 42

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UK Tech Mogul Lynch Beats HP Fraud Case in Stunning US Loss (2)

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In a staggering loss for US prosecutors, a jury found UK tech tycoon Mike Lynch not guilty of criminal charges that he pulled off Silicon Valley’s biggest-ever fraud 13 years ago by duping Hewlett Packard Co. into buying his software startup for $11 billion.

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Home » Strategic Management » Case Study on Corporate Governance: Satyam Scam

Case Study on Corporate Governance: Satyam Scam

Satyam Computers services limited was a consulting and an Information Technology (IT) services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth largest company in India’s IT industry, offering a variety of IT services to many types of businesses. Its’ networks spanned from 46 countries, across 6 continents and employing over 20,000 IT professionals. On 7 th January 2009, Satyam scandal was publicly announced & Mr. Ramalingam confessed and notified SEBI of having falsified the account.

Raju confessed that Satyam’s balance sheet of 30 September 2008 contained:

• Inflated figures for cash and bank balances of Rs 5,040 crores (US$ 1.04 billion) [as against Rs 5,361 crores (US$ 1.1 billion) reflected in the books].
• An accrued interest of Rs. 376 crores (US$ 77.46 million) which was non-existent.
• An understated liability of Rs. 1,230 crores (US$ 253.38 million) on account of funds which were arranged by himself.
• An overstated debtors’ position of Rs. 490 crores (US$ 100.94 million) [as against Rs. 2,651 crores (US$ 546.11 million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his company’s revenues contained the following statements:

“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly [annualized revenue run rate of Rs 11,276 crores (US$ 2.32 billion) in the September quarter of 2008 and official reserves of Rs 8,392 crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. It was like riding a tiger, not knowing how to get off without being eaten.”

The Scandal:

The scandal all came to light with a successful effort on the part of investor’s to prevent an attempt by the minority shareholding promoters to use the firm’s cash reserves to buy two companies owned by them i.e. Maytas Properties and Maytas Infra. As a result, this aborted an attempt of expansion on Satyam’s part, which in turn led to a collapse in price of company’s stock following with a shocking confession by Raju, The truth was its’ promoters had decided to inflate the revenue and profit figures of Satyam thereby manipulating their balance sheet consisting non-existent assets, cash reserves and liabilities.

The probable reasons:

Deriving high stock values would allow the promoters to enjoy benefits allowing them to buy real wealth outside the company and thereby giving them opportunity to derive money to acquire large stakes in other firms on another hand. There could be the reason as to why Raju’s family build its shareholding and shed it when required.

After the scandal, on 10 January 2009, the Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. On 5th February 2009, the six-member board appointed by the Government of India named A. S. Murthy as the new CEO of the firm with immediate effect. The board consisted of:

1) Banker Deepak Parekh.

2) IT expert Kiran Karnik.

3) Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation.

4) Tarun Das, chief mentor of the Confederation of Indian Industry and

5) T N Manoharan, former President of the Institute of Chartered Accountants of India.

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• Case Study on Corporate Governance: WorldCom Scandal
• Case Study: Scam of the Century – Bernie Madoff’s Ponzi Scheme
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Corporate Frauds in India – Part I

CA Naresh Kataria

Introduction

Corporate frauds have emerged as the biggest risks which companies are exposed to, and are increasingly becoming a big threat. Incidents of frauds are increasingly at an alarming rate and in the process: 

• Destroy the confidence of investors in stock markets
• Results in enormous destruction in wealth of investors
• Damage the reputation of the affected company, its management and board of directors
• Erode ability of affected company to borrow and thus creating financial stress.

In case of frauds involving large amounts causing going concern issues (raising doubts in the ability of the company to continue its operation in the near- future)-e.g. Enron, Lehman brothers

Regulations are being regularly tightened to ensure monitoring, vigilance and disclosure mechanisms including whistle blowers’ complaints. It is a universal truth that fraudsters are always a step ahead of regulators.

We must accept that frauds are inevitable, and companies should lay down strong systems, processes, corporate governance practices and a robust recruitment process to ensure that right people with integrity and value systems are hired.

It is also important to create awareness among employees through rigorous training mechanisms, as to areas exposed to fraud and ensure that frauds are impartially investigated and culprits are punished, in time.

This article is divided into following sections:

• Major corporate frauds in India 

Part -2 

• Common threads in frauds
• Commonly used mechanism to commit frauds 
• How to create a fraud agonistic organisation
• Indicators of potential frauds
• Conclusions

Major corporate frauds in India

1. Satyam computer (Satyam)

Satyam was the first major fraud of its kind, which shocked the country and led to tightening of regulations, reporting and governance mechanisms. The fraud had the same shock and awe effect like what Enron and Lehman brothers had in the USA. The enactment of strictest ever regulation, namely, Sarbanes and Oxley, was the outcome of these frauds and many countries followed with enactment of similar regulations.

Promoters of the company had devised ingenious methods to commit frauds with large scale dummy billings for services rendered to foreign clients. As a logical step forward, fake proceeds were shown to have been received in multiple bank accounts, opened in various countries. Many of these accounts were later found to be non-existing.

The company was consistently showing large bank balances in its financial statements, which were not consistent with other IT companies considering the size of its business. The whole of these operations was overseen by the promoter with the assistance of a separate staff working on this, what I would call a fraud factory.

At the closure of financials and to satisfy auditors, fake bank confirmations and statements were generated and produced as evidence of balances to auditors. The amount involved in the fraud was around USD 1 billion.

Surprisingly, Satyam received awards for excellence in corporate governance, conferred by some reputed organisations. Its promoter had over a period acquired respect of the industry and an overwhelming persona. In this background, sudden admission of fraud by the promoter, came as a rude shock to the country,

All said and done, Satyam had a sound business model and portfolio of large international clients. Government had to initiate an unprecedented rescue mission to save the company, by first dismissing the board members of the company, followed by the appointment of professionals as board members led by Deepak Parikh. Ultimately, the company was sold to Mahindra group and is now a major part of the successful technology business of the Group. 

2. Kingfisher Airlines (KLA)

KLA was another corporate fraud, which was first of its kind in the Airlines industry, which ultimately led to fall of the empire of King of good times. The airline was launched by flamboyant Vijay Mallya, well known as King of good times. Over a short period of time KLA established a reputation of finest private airline of the country, with high quality service standard and was enjoying second highest market share after Jet Airways.

The company resorted to borrowing funds by all possible means, including related parties and pledge of Kingfisher brand by over-valuation of brand value. Good times did not last long, and Vijay Malia had to sell its family jewel liquor and beer business to liquidate part of its debts.

Currently Vijay Malia is in the UK and fighting battle in courts to stop his repatriation into India. Consortium of banks led by SBI has exposure of around Rs, 9000 crores to now a virtually bankrupt airline. Most employees lost or quit jobs as salaries were nor paid for months together. The company went to the extent of defaulting in depositing statutory dues like PF, TDS deducted from salaries to government authorities.

Kingfisher seems to me more of a case of business failures rather than corporate frauds. There were a lot of red flags which could have been picked by lenders and regulators, which were ignored and could have saved airlines which had good potential. Lending against a brand which had never been a practice is a glaring example. A Satyam type quick rescue operation could have parachuted the airline into safety and saved lenders money and employees’ jobs.

3. Jet Airways

The airline, which was once India’s pride, landed in IBC for  rescue . After multiple bidding over 18 months, Jet finally had a bidder (with an investor), who is non- experienced in the airlines business.

Jet had acquired an unassailable position in the industry and was a preferred airline for the business community, top industrialists and CEOs of the country. Its service standards were its USP.

Lenders’ exposure to the airlines, amounts to around Rs 8500 crores and total liabilities of around Rs.25000 crores including dues to vendors, employees, AAI, lessors of aircrafts.    

The company indulged in multiple fraudulent practices of -

• overstating commission paid to a Dubai related party based in Dubai for years. This resulted in significant overstatement of expenses and underreporting of profits.
• diversion of funds by giving loans of around Rs.3353 Crores
• accounting of invoices of fake  on Jet miles
• other similar transactions

Employees lost jobs with huge arrears of salaries. Further, acquisition of low-cost service airline, Sahara Airlines - in hindsight, the acquisition proved to be its nemesis and accelerated the downfall of Jet Airways.

4. Bhushan Steel

Bhushan Steel was an unprecedented case of defrauding major banks of India. The company was acquired by Tata Steel, though matter is still under litigation. 

Promoters of the otherwise profitable company, with modern large-scale plants, indulged in multiple fraudulent practices of: 

• Transfer of   funds borrowed by the company to various related parties by way of loans or advances 
• Accounting of bills for capital and other purchases, which were never incurred and funds so generated were misappropriated by promoters for their benefits
• Amount involved was around Rs. 50000 crores.

Bhushan Power and Steel (BPSL), another group company is currently under IBC. JSW Steel is expected to acquire BPSL.

According to the CBI, BPSL diverted around Rs 2,348 crore through its directors and staff from the loan accounts of various banks, into the accounts of more than 200 shell companies without any obvious purpose .

PNB was the first major banking fraud reported in the country, involving a massive amount of around Rs. 15000 crores. Fraud was committed by Nirav Modi and Mehul Choksi, (through Gitanjali Gems, a listed company owned by him). Both were in the business of importing rough diamonds and exporting polished diamonds.

Over a period, both had built retail chains of diamond business in India and at famous international destinations. Nirav was, particularly, PR and showmanship savvy.

At that time no one questioned the source of his funding. It was only after a few years, that this unprecedented fraud came to light, which shocked the nation as never before.

He was defrauding PNB and other bankers by opening LCs of large amounts without any underlying transactions (paper money in essence), with the connivance of a few junior level banking officials. He exploited an elementary deficiency in the IT systems of non-reconciliation of LCs opened with the underlying transactions. LCs opened were not recorded in the RTGS system as was the requirement applicable to all banks. Hence, existence of such LCs was not known till the time the fraud was unearthed. 

Amounts involved are estimated to be around Rs 16000 crores (including dues of Mehul Choksi). Here again, there were multiple red flags, which were ignored by banks management and regulators, which could have unearthed the fraud much earlier. Periodic inspection reports of RBI, highlighting this deficiency, which were placed before the board, were not actioned, RBI also issued red alert to all banks several times, instructing banks to set right these system deficiencies (mainly RTGC and non-reconciliation). But these also went unattended.

Nirav and Mehul managed to fly out of India and currently India is trying hard in international courts to bring them back to India.

ILFS fraud was the largest corporate fraud in India and triggered a showdown in the economy, as the company was a key vehicle for infrastructure development of the country. Fraud occurred, in spite of marquee shareholders like LIC, SBI etc., being the largest shareholders, having representatives on board. ILFS had the largest debt exposure of around Rs. 91000 crores (including Rs, 20000 crores invested by PF and pension funds),

Fraud was perpetrated mainly by: 

• Diversion of borrowed funds to related entities of some of members of top management team
• Imprudent lending to parties who were not credit worth for ulterior motives
• Evergreening of loans by routing money from one group company to another through an unrelated party
• Over invoicing of project costs by vendors, accounting of fake expenses etc and difference being routed back to related entities of some of members of top management team
• Overstatement of profits by non- provisioning of loans, accounting of fake expense, inappropriate recognition of project revenue etc.
• The company had unprecedented number of subsidiaries and group companies, (346) which were used to route above transactions
• Non – disclosure of some of these companies as related parties
• Non-disclosure some of subsidiaries, associates, joint ventures

Most of the mutual funds, insurance companies and PF gratuity funds had invested large sums in its debt issuance, due to the high credit rating of the company. It was a case of negligence by reputed credit rating agencies that rating was not downgraded in spite of clear signs of financial stress in the company. Rating was downgraded abruptly to lowest level from the highest only after the company defaulted in its repayment obligations.

Surprisingly, this public interest entity, was run for years by the same top management team, who were treating ILFS as personal property. Their subordinates and even Board were so overawed by their overpowering persona that no one dared to challenge their decisions. Fraud was going on for years, but could not be detected till the damage was done.

Like Satyam, the government suspended the board and appointed eminent experts to the board chaired by reputed and seasoned banker, Uday Kotak. Currently the company is under resolution process and some of its infrastructure has been sold. However, progress has been slow. Hence, the extent and timing of recovery is uncertain.

DHFL was the first ever fraud in a housing finance company, which happened mainly due to active involvement of promoters in syphoning of funds and alleged money laundering.

How fraud was committed: 

• Granting of loans to related parties of promoters
• Loans granted to parties, who were not credit worthy or were unknown having same addresses in obscure locations
• Evergreening of bad loans
• Creation of around 6 lacs dummy accounts at one branch, using name of borrowers who had already repaid loans. These accounts were used to grant loans which were used to siphon funds to promoter companies. These loans ultimately turned out to be non-recoverable
• Utilisation of borrowed funds for personal purposes, such as acquiring personal properties, yachts etc.
• Consequently, huge amounts were shown as recoverable in the balance sheet, which were not recoverable

8. PMC Bank

Promoters of DHFL were de-facto controlling operations of PMC bank, (a cooperative bank), perpetuated frauds by adopting identical methods. The bank had larger deposits of middle-class depositors, who had deposited their hard-earned savings with the bank for various requirements like medical treatment, education cost of children, retirement, and emergency needs. More than 60% of its customers had small deposits of around ₹10,000 each in the bank.

During investigation, it was found that:

• Around 70 percent of its total loan book of Rs 8,383 crore as on March 31, 2019, had been taken by real estate firm HDIL.
• The bank had been allegedly running fraudulent transactions for several years to facilitate lending to HDIL through fictitious accounts and violating single-party lending rules.

Depositors are struggling to recover their money and some of them committed suicide. Authorities are in the process of recovering properties acquired by the promoters and progress is tardy.

As per latest newspaper reports, the bank has invited expression of interest for investment and equity participation in the bank for its reconstruction.

9. YES Bank

Fraud led to the unexpected and sudden fall of a private bank which was emerging as a good competition to other private banks. The bank had a differentiated business model, with focus on technology, branches network, focus on retail loans etc. 

Promoter of the bank, Rana Kapoor had, over a short period of time, built an overwhelming image in the industry and had developed contacts with top industrialists of the country. Most of the decision making on key matters including large loans was centralised in his hands. He had the ambition to make YES Bank the largest private bank of the country. It was this ambition which perhaps led to the sharp downfall in fortunes of the bank, steeper than its rise to an eminent position in the banking industry.

How fraud was committed:

• Imprudent lending practices
• Evergreening of loans
• Practice of charging high commission to borrowers, which was not in line with industry practices
• Overstatement of profits due to front loading of commission income
• Gross under provisioning of NPAs compared to RBI guidelines

During special inspection carried out by RBI (Asset quality reviews-AQR which was carried for all banks), significant differences were observed between actual and required provisioning for various years.

Finance ministry acted swiftly to restore the confidence in the banking system and a majority stake in the bank was acquired by SBI. Efforts are still on to ensure that the bank is restored to its original health by significant equity infusion by institutional investors and other measures.

10. Cafe Coffee day (CCD)

CCD was the first company to set up a large chain of coffee shops across India and a trend setter. Over-leveraging to find expansion of the chain and diversion of funds to non-core business led to the downfall of the Company, which had a sound business model from growing coffee in its own fields to serving a wide variety of coffee to customers. 

The debacle of company resulted in unfortunate suicide by its promoter. Amounts due to banks are around Rs . 2500 crores to Rs. 3000 crores. Currently, Tata group is in talks with CCD for acquiring its coffee outlets, which if materialises, will rescue the company, and put it back on the recovery path.

11. Spot Exchange of India

The company lured Investors with high assured returns by raising money bills purported to represent purchase of commodities. These stocks were subsequently sold back to investors at a predetermined rate to give assured returns.

There were no physical stocks available with the exchange. The whole transaction was in substance a pure investment transaction without any underlying stocks.

It was a case of teeming and lading, where money invested by one investor was utilised to pay another investor with assured returns. Regulators banned such transactions, when these wrongdoings came to their notice. Sudden ban closed the taps and in the absence of fresh inflow from investors, the Exchange intermediaries could not honour the transaction of sales back to investors.

As of now, most of investors’ money is stuck and part payments had been made from sale proceeds of attached assets of promoters. Ultimate recovery, both time and extent, is currently uncertain.

Other major frauds, which occurred in the last few years are:

• Ranbaxy and Religare group (Singh Brothers)
• Kwality products
• Amrapali builders
• C G Consumers
• Cox & King

The above list is not all inclusive, but nevertheless covers major corporate frauds of India. In all above cases, the mechanism of committing frauds was identical.

***You can access all parts of the series on Corporate Frauds in India below:

M R Siva on June 11 2023

Very informative and enlightening article for investors

Deepankar Bhattacharjee on April 3 2022

This article made me an eye opener. It's really very useful information.

clement on February 19 2021

It really helped me

Radhakrishnan on November 8 2020

Beautifully covered. Even a layman can understand. Thanks for the article. Must be an eye opener for many.

Kapil on November 7 2020

Informative article

Mohinder Batra on November 7 2020

Brilliantly & minutely captured relevant points related to frauds, will look forward to part II of the article

DineshKumar Chauhan on November 7 2020

A perfect article summarising the major corporate frauds & their causes. Interesting read.

Mitesh on November 6 2020

Very interesting.

Jinesh H Shah on November 6 2020

Nice article covering major corporate fraud and failure. There is learning on each of such fraud and also these fraud has impacted auditing industry very significantly.

Corporate Fraud in India – Case Studies of Sahara and Saradha

Part i of spi’s india series.

By: Aparajita Pande

First there was Ketan Parekh. Then there was 2G. And then there were Satyam, Tatra, Saradha, Sahara and countless others. Corruption has come to be viewed as an inevitable, if unfortunate, cost of getting things done in India, and corporate and political panjandrums resolutely adhere to this school of thought. This kind of large-scale fraud is aided by the strong political-corporate nexus that exists in India. Market regulators like the Securities and Exchange Board of India (SEBI) are ultimately powerless in exercising strict control over financial institutions due to severe political pressure. This paper looks into the specific cases of the Sahara India investor fraud case and the Saradha Group chit fund scam to reveal the nature of corporate scams in India, their ethical implications and possible solutions.

On February 26, 2014, shock waves were felt through the country as the Supreme Court of India sanctioned a non-bailable warrant for the arrest of Sahara India Pariwar Chairman Subrata Roy. [ 1 ] This decision attracted attention for one major, unexpected reason. One would consider investor fraud worth more than US $3 billion as incredulous under any circumstance, but corporate scandals of this nature in India have lost their propensity to amaze. Indeed, what was most surprising about this case was real consequences for the perpetrator, a rarity for corporate crimes in India. Despite immense political pressure and the regulatory body’s own restrained powers, the Securities and Exchange Board of India managed to secure a landmark victory after an arduous, five-year battle against Sahara.

The Saradha Group scam of 2013 also saw as many as 1.7 million investors of a Ponzi scheme lose approximately US $5 billion when it collapsed. [ 2 ] Unarguably, networks with high-ranking politicians in the state government of West Bengal allowed the Ponzi scheme to stay afloat undetected for as long as it did. Here, too, regulatory bodies like SEBI were blatantly disregarded until the scheme went bust in April 2013. Complete with ineffectual regulatory bodies struggling to have a voice and coercive political interests, the Sahara and Saradha scandals are the classic examples of everything that makes corporate fraud in India possible.

Case Study 1: Sahara Group

Since 2009, when the Sahara Group’s activities first came under the radar of SEBI leading up to the arrest of Sahara India Pariwar founder Subrata Roy in 2014, both parties have been engaged in an aggressive regulatory conflict. SEBI alleged that Sahara India Real Estate Corp Ltd (SIRECL) and Sahara Housing Investment Corp Ltd (SHICL), which issued Optional Fully Convertible Debentures (OFCD), illegally collected investor money. [ 3 ] Meanwhile, Sahara denied SEBI had any jurisdiction in the matter. [ 4 ]

SEBI went on to order Sahara to issue a full refund to its investors, which was challenged by Sahara before the Securities Appellate Tribunal (SAT). [ 5 ] When the SAT upheld SEBI’s order, Sahara moved to the Supreme Court in August 2012, which ordered Sahara to refund investors’ money by depositing it with SEBI. [ 6 ] Sahara then declared that most of the US $3.9 billion had already been repaid to investors, save for a paltry US $840 million, which it handed over to SEBI. [ 7 ] This was disputed by SEBI, which claimed that the details of the investors who were refunded had not been provided. When Sahara failed to deposit the remaining money with SEBI and Subrata Roy skipped his hearing, the Supreme Court of India issued an arrest warrant for the Sahara chief in February 2014. [ 8 ]

Amid rumors of black money laundering and the misuse of political connections, Sahara vehemently denied all charges and continued to defy SEBI. The regulator persevered through what the Supreme Court referred to as the “ridiculous game of cat and mouse” and finally managed to pin down Sahara chief Subrata Roy in 2014. [ 9 ] In this rare victory, SEBI not only brought Sahara to justice, but also made an excellent case for why the regulator, and others like it, require greater autonomy and penalizing powers.

Case Study 2: Saradha ‘Chit Fund’ Ponzi Scheme

India has been flooded with various Ponzi schemes that take advantage of unsuspecting investors looking for alternate banking options . Lacking access to formal banks, low-income Indians often rely on informal banking. These informal banks invariably consist of money lenders who charge interest at inflated rates and were soon replaced by more sophisticated methods of conning people through disguised Ponzi schemes. Fundraising is done through legal activities such as collective investment schemes, non-convertible debentures and preference shares, as well as illegally through hoax financial instruments such as fictitious ventures in construction and tourism. The rapid spread of Ponzi schemes, especially in North India, has various causes, not the least of which include the lack of awareness about banking norms, steadily falling interest rates, lack of legal action against such activities, and the security of political patronage. [ 10 ]

The Ponzi scheme run by Saradha Group collected money from investors by issuing redeemable bonds and secured debentures and promising incredulously high profits from reasonable investments. [ 11 ] Local agents were hired throughout the state of West Bengal and given huge cash payouts from investor deposits to expand quickly, eventually forming a conglomerate of more than 200 companies. This syndicate was used to launder money and confuse regulators like SEBI. In April 2013, the scheme collapsed completely causing a loss of approximately US $5 billion and bankrupting many of its low-income investors. [ 12 ]

SEBI first detected something suspicious in the group’s activities in 2009. It challenged Saradha because the company had not complied with the Indian Companies Act, which requires any company raising money from more than 50 investors to have a formal prospectus, and categorical permission from SEBI, the market regulator. [ 13 ] The Saradha Group sought to evade prosecution by expanding the number of companies, thus creating a convoluted web of interconnected players. This created innumerable complications for SEBI, which labored to investigate Saradha in spite of them. In 2012, Saradha decided to switch it up by resorting to different fundraising activities, such as collective investment schemes (CIS) that were disguised as tourism packages, real estate projects, and the like. [ 14 ] Many investors were duped into investing in what they thought was a chit fund. This, too, was an attempt to get SEBI off its back, as chit funds fall under the jurisdiction of the state government, not SEBI. [ 15 ] However, SEBI managed to identify the group was not, in fact, raising capital through a chit fund scheme and ordered Saradha to immediately stop its activities until cleared by SEBI. [ 16 ] SEBI had previously warned the state government of West Bengal about Saradha Group’s hoax chit fund activities in 2011 but to no avail. Both the government as well as Saradha generally ignored SEBI until the company finally went bust in 2013.

After the scandal broke, an inquiry commission investigated the group, and a relief fund of approximately US $90 million protected low-income investors. [ 17 ] In 2014, the Supreme Court transferred all investigations in the Saradha case to the Central Bureau of Investigation (CBI) amid allegations of political interference in the state-ordered investigation. [ 18 ]

What is SEBI: Powers and Limitations

In accordance with Section 11(1) of the Securities and Exchange Board of India Act 1992, SEBI is required to protect the interests of investors in securities and regulate and promote the development of the securities market. [] Established in 1988, the Securities and Exchange Board of India (SEBI) was instituted as the official regulator of Indian markets but was only given statutory powers through the SEBI Act in 1992 by Indian Parliament.

SEBI’s primary goal is to cater to the needs of the market, which include investors, issuers of securities and any third parties involved. Its functions include, but are not limited to, regulating the stock market, preventing insider trading , managing company takeovers and acquisition of shares, and investigating fraudulent activities in the securities market. [ 20 ] To an extent, SEBI has successfully made tangible changes in the market. It did away with inefficiencies and delays by passing the Depositories Act, which eliminated the need for physical documents and certificates and played a major role in moving markets toward an electronic and paperless platform. [ 21 ] Administrative achievements aside, SEBI also made strict changes that demanded corporate promoters disclose more information. [ 22 ]

That being said, SEBI has its fair share of problems as well. Many perceive, and perhaps rightly so, the regulatory body is all bark, no bite. One of the major criticisms against the SEBI Act was it did not provide SEBI with sufficient powers. The government, particularly the Finance Ministry, has an unnecessarily constrictive hold on SEBI, which makes the regulator extremely susceptible to political interference for three main reasons. Firstly, although SEBI has the right to create rules and regulations by which capital markets abide, it does not have the right to implement them without the approval of the federal government. Arguably, the Finance Ministry may have a say in the framework of market regulations, and it can have the power to make recommendations. The process of obtaining the government’s authorization invariably causes needless delays and results in watered-down versions of the rules being implemented.

Secondly, SEBI still does not have the power to prosecute without the consent of the government. Its powers are restricted to recommending action to the government, rendering it unable to take direct action against any errant company. This is a major reason why the Sahara-SEBI war dragged on for as long as it did. Were SEBI allowed to prosecute without having to constantly answer to the government, the Sahara investor fraud would have been an open-and-shut case. SEBI must have the independent power to prosecute government interference, like the Securities Exchange Commission (SEC) in the United States.

Finally, and perhaps most importantly, the appointment process of the members of SEBI is flawed. The board has eight members: the chairman, who is nominated by the Central Government; one member from the Reserve Bank of India; two officials from the Finance Ministry; and five remaining members who are recommended by the Union Government. [ 23 ] The fact the Finance Ministry is directly or indirectly responsible for almost all of these key appointments greatly compromises the legitimacy of SEBI as an independent, unbiased watchdog. A Public Interest Litigation (PIL) challenging the legitimacy of this appointment process has been filed in the Supreme Court. [ 24 ]

Political players in Corporate Fraud

Politicians are no strangers to financial scandals in India. Whether it is the Commonwealth Games scandal, which involved the misappropriation of millions of dollars by then-chairman and Congress member Suresh Kalmadi, or the 2G scam, which involved telecom companies being undercharged by government officials for licenses, most prominent cases of fraud usually have a trace of political meddling.

Sahara is not unique in this sense. Many commentators proclaim that Subrata Roy would not have had the nerve to ignore Supreme Court orders so blatantly if there were no political reassurances given to him. [ 25 ] In June 2011, former SEBI member KM Abraham wrote a whistle-blowing letter to Dr. Manmohan Singh, Prime Minister of India, blaming the Finance Ministry for interference. [ 26 ] He claimed that then-Finance Minister Pranab Mukherjee and his advisor, Omita Paul, were trying to force SEBI Chairman UK Sinha to “manage” high profile cases, including Sahara, though this account was denied by the Finance Ministry as well as Sinha.

The political interference in the Saradha Group case is more apparent. Several members of the West Bengal ruling party, the Trinamool Congress (TMC), personally benefitted from the scheme. For instance, there are many reports that suggest Sudipto Sen, Chairman of the Saradha Group, bought paintings by Mamata Banerjee, the Chief Minister of West Bengal, whose government later issued circulars to public libraries to display newspapers published by Saradha. [ 27 ] Several Members of Parliament, such as Srinjoy Bose and Kunal Ghosh, were connected to Saradha. Kunal Ghosh reportedly received a salary of over 1.5 million rupees (US$24,000) per month from the Saradha Group. [ 28 ] In an 18-page confessional to the Central Bureau of Investigation, Sudipto Sen admitted to illicitly paying huge sums of investor money to many politicians. Among the few he named were Manoranjana Singh, wife of former Congress member of Parliament Matang Singh, and Kunal Ghosh, whom he accused of blackmail. [ 29 ] Many high profile personalities, including Transport Minister Madan Mitra and actor and TMC member Satabdi Roy, publicly endorsed the Saradha Group. [ 30 ]

The Ethics of Corporate Fraud: Should We Care?

When we think of corporate fraud, there is a tendency to imagine it as an isolated event with no real repercussions in our lives. We often look at the lofty numbers and associate the loss with an abstract, theoretical entity. In reality, the financial costs of corporate scams have deep ethical considerations and significant implications in our lives. The 2012 Global Fraud Study conducted by the Association of Certified Fraud Examiners (ACFE) reviewed 1,388 incidents of fraud worldwide and found that the average organization loses 5 percent of its annual revenue to fraud. [ 31 ] This might not seem pertinent when set against the backdrop of each individual company. However, looking at it in global context, it amounts to a projected annual fraud loss of US $3.5 trillion.

In perspective, this is US $3.5 trillion that would have otherwise been used to provide other services and products. Many of these scams include taxpayer money that would ideally go toward improving amenities for citizens. Clearly, corporate fraud has deep financial ramifications for all of us, even if we don’t see them immediately. So yes, we should care. However, should financial aspects be the only reason we care? Ethics no longer remain a matter of personal opinion and strict guidelines need to be enforced in order to clearly differentiate between right and wrong. Companies that commit fraud cross ethical lines that have far reaching consequences.

With a population of over 1.2 billion, more than 250 million people in India live in abject poverty. [ 32 ] Corruption at the top and grassroots level is at an all-time high, and GDP growth has slowed to 4.7 percent in 2014. [ 33 ] The Indian economy relies significantly on the corporate sector, and the rising number of financial scams has pertinent ethical implications now more than ever. The Sahara and Saradha Group scandals represent the antithesis of all business ethics. Sahara, for one, has been convicted of wrongfully acquiring investor money without proper authorization. Of course, there is the obvious issue of misrepresenting funding activities to investors as well as SEBI, but that is simply the tip of the iceberg. There is widespread speculation that the 40 million investors of the Sahara schemes were a front made up to hide black money from influential donors. [ 34 ] It is hardly any secret that Sahara made it extremely difficult for SEBI to track down investors, not only by sending a plethora of paperwork in 127 trucks for them to sift through, but also by refusing to refund the money to SEBI in the first place. Indeed, SEBI has found that the documents Sahara provided do not provide sufficient, verifiable information, and SEBI has heard back from less than 1 percent of the 20,000 investors it contacted, with many addresses turning out to be invalid. [ 35 ]

If there is any truth to the accusations of Sahara laundering black money, this is a clear breach of ethics on their part. By definition, black money includes money siphoned off by illegal means that was ideally meant to provide other services. Not only is this a blatant misuse of other people’s money, it also raises serious questions about government resources that were wasted on this unnecessarily long investigation.

On the other hand, the ethical violations committed by the Saradha Group were more obvious and possibly more damaging. The schemes run by Saradha were primarily aimed at low-income people who did not have access to formal banking. Unsurprisingly, these low income investors were hit hardest by the scam. When the Ponzi scheme collapsed, it caused severe financial loss to its 1.7 million investors, but the poorer population of West Bengal bore the worst brunt. Many were bankrupted, and a great number resorted to suicide. [ 36 ]

The Saradha case undoubtedly represents the worst kind of damage unethical practices in business can beget. The ramifications of the actions of a few conniving businessmen and politicians can still be felt throughout rural West Bengal. There is no doubt that conning poor people into investing in a hoax scheme, only to abandon them when it collapses, falls in the far dark end of the ethical spectrum. Therefore, corporate scams of this nature not only symbolize the ethical and moral standards of a company but on a larger scale represent those of the country and her people. This sort of generalization can cause foreign companies to lose interest in investing in a country and could cost India (or any country, for that matter) dearly.

The Purge: Potential Solutions

A recent survey by Grant Thornton and Assocham finds that cases of financial fraud have risen in India over the last few years and become one of the main factors deterring foreign companies from investing in India. [ 37 ] As the economy grows to keep pace with the steadily growing needs of the population, corporate fraud is disastrous for India. To bring about a visible decline in the culture of corporate scams in India, three major systematic changes can and need to take place.

Firstly, laws protecting whistleblowers are imperative. The likelihood of people coming forth to willingly provide information will be a lot higher if they are provided with basic assurances. Safety from political threats and job security can ensure more people will be willing to volunteer information and increase transparency in the Indian corporate sector. Secondly, federal and market regulators need a greater level of autonomy than they presently enjoy. The Reserve Bank of India, SEBI and other regulators can only be efficient provided their work is not directed by political influences. Thirdly, and perhaps most importantly, there is a crucial need for judicial reform in India. The judicial system’s slow-moving course causes needless delays and allows corporate violators to find underhanded methods to evade justice. Corporate cases, especially cases of such magnitude, need to be fast-tracked to reach resolution quickly so violators can be dealt severe and immediate consequences.

Editor: Angela Lutz

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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., 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., related articles more from author.

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Could AI Be The Solution To Cross-Border Payment Fraud?

• Financial Crime

In 2023 alone, global fraud incurred a staggering cost of $485 billion, as reported by the Nasdaq-Verafin Global Financial Crime Report .

This growing challenge is becoming increasingly acute for market participants, particularly with the advent of real-time payments, and can incur significant reputational damage in addition to financial cost. Fraudsters are constantly devising new tactics to exploit vulnerabilities in the cross-border payments ecosystem, leaving financial institutions struggling to keep pace.

Traditional fraud detection methods, relying on rules-based systems and manual monitoring, have proven inadequate in the face of this evolving threat landscape.

These approaches often fail to detect sophisticated, anomalous patterns of activity, resulting in missed opportunities to prevent fraudulent transactions before they occur. As the financial industry grapples with the escalating fraud crisis, the need for a more innovative, proactive, and collaborative approach has become increasingly apparent.

Enter the AI-pilot

Swift, the global member-owned cooperative and the world’s leading provider of secure financial messaging services, has come up with a plan.

With its trusted position at the heart of the financial industry and the vast trove of transaction data flowing across its global network of over 11,500 institutions, Swift has realised that AI could be the perfect sidekick to help in the fight against financial crime.

At the end of May, it announced two  AI-based experiments in collaboration with its member banks. The first pilot aims to enhance Swift’s existing Payment Controls service, which helps financial institutions detect anomalies that could be indicative of fraud.

By leveraging an AI model trained on historical patterns of activity on the Swift network, the enhanced Payment Controls service will create a more nuanced and accurate picture of potential fraud activity. This innovative approach will enable financial institutions to identify and flag anomalous payments before they are executed, providing a critical layer of defence against cross-border payments fraud.

Importantly, this pilot will utilize the participating banks’ own live traffic data, ensuring the findings have real-world applicability and can be seamlessly integrated into their existing fraud prevention frameworks. Swift will work closely with the pilot participants to refine the AI-powered enhancement, with the ultimate goal of making it available to all 500+ Payment Controls customers worldwide.

Pioneering Secure Data Collaboration

In a separate initiative, Swift has convened a group of 10 leading financial institutions from around the world, including BNY Mellon, Deutsche Bank, DNB, HSBC, Intesa Sanpaolo, and Standard Bank, to explore how advanced AI technology can be leveraged to enhance the industry’s collective defense against fraud.

This pilot will test the use of secure data collaboration and federated learning technologies to enable financial institutions to anonymously share relevant information and insights, while preserving the privacy and confidentiality of their data.

The federated learning approach will then allow Swift’s AI anomaly detection model to be trained on this much richer and broader dataset, enabling it to identify patterns and gather insights that would be impossible for any single institution to achieve alone. The result will be an enhancement to the model’s fraud detection capabilities, benefiting the entire cross-border payments ecosystem.

Don’t forget responsible AI Governance

As Swift pursues these transformative AI initiatives, the cooperative has placed a strong emphasis on responsible AI governance.

In collaboration with its industry partners, Swift has developed a comprehensive framework to ensure that accuracy, explainability, fairness, auditability, security, and privacy are integral to every aspect of its AI applications.

This commitment to ethical and transparent AI implementation aligns with emerging global standards, such as ISO 42001, the NIST AI Risk Management Framework, and the EU AI Act.

By adhering to these principles, Swift is not only delivering innovative solutions to combat fraud, but also setting a precedent for the responsible use of AI within the financial industry.

Unlocking the Full Potential of AI in Cross-Border Payments

The potential of AI to change the fight against cross-border payments fraud is undeniable.

Swift’s collaborative initiatives with its member banks showcase the power of harnessing this transformative technology to enhance fraud detection, reduce operational costs, and deliver a more secure and frictionless payments experience for customers.

By leveraging its unique position at the heart of the global financial ecosystem, Swift is leading the charge in bringing the industry together to tackle this persistent challenge. The results of these AI pilots have the potential to save the industry billions in fraud-related costs, while also contributing to the broader goal of increasing the speed and efficiency of cross-border payments.

As the regulatory landscape evolves and the financial community’s appetite for innovative, AI-powered solutions grows, Swift’s pioneering work in this space positions the cooperative as a trusted partner and industry leader in the fight against cross-border payments fraud.

As Isabel Schmidt, Executive Platform Owner at BNY Mellon Treasury Services, aptly stated, “Combatting fraud successfully will require industry collaboration, collective action, and strong leadership from operators like Swift.”

This sentiment is echoed by other industry luminaries, such as Ole Matthiessen, Global Head of Cash Management & Head of Corporate Bank APAC, Middle East & Africa at Deutsche Bank, who emphasized the importance of “partnership and collaboration across the market” in driving innovation and enhancing fraud detection capabilities.

Empowering Financial Institutions

For financial institutions, the benefits of Swift’s AI-powered fraud detection initiatives extend far beyond just cost savings.

By harnessing the power of AI, these organizations can enhance their ability to detect and prevent fraud, ultimately strengthening their overall financial resilience and safeguarding the interests of their customers.

“Building financial resiliency and strengthening risk management is a key priority for our clients, and they are looking to us to help them better manage uncertainty and threat through our solutions while supporting their businesses to grow and transform,” says Manish Kohli, Head of Global Payments Solutions at HSBC.

The implementation of Swift’s AI-driven fraud detection capabilities can directly address these pressing concerns, empowering financial institutions to protect their customers, data, and reputation in an increasingly volatile landscape.

Extending the Reach of Anti-Fraud Collaboration Globally

Beyond the immediate benefits to individual financial institutions, Swift’s AI initiatives also hold the potential to drive broader, systemic change in the industry’s approach to combating fraud.

By facilitating the secure and confidential exchange of anti-fraud intelligence, the cooperative is laying the groundwork for a more interconnected and collaborative ecosystem, where financial institutions can collectively strengthen their defenses against evolving fraud threats.

“Extending and strengthening the collaboration of anti-fraud experts and the exchange of data also at an international level will improve the prevention of and fight against fraud,” says As Enrico Canna, Head of Anti-Fraud & Customer Protection Center at Intesa Sanpaolo.

This global, coordinated approach represents a significant departure from the traditionally siloed and fragmented nature of fraud prevention efforts, promising to yield more robust and resilient safeguards for the entire cross-border payments industry.

Charting a Course Towards

Swift’s AI-powered fraud detection initiatives are not merely incremental improvements, but signal a shift in the industry’s approach to combating cross-border payments fraud. By leveraging the power of AI, the cooperative is poised to deliver tangible and far-reaching benefits, from reducing operational costs and enhancing customer trust to contributing to the broader goal of increasing the speed and efficiency of cross-border payments.

As the financial industry continues to grapple with the escalating fraud crisis, Swift’s pioneering work in this space positions the cooperative as a trusted partner and industry leader.

Through its collaborative efforts, Swift is not only strengthening the collective defenses of its member banks, but also charting a course towards a more secure and efficient payments landscape that can better serve the evolving needs of businesses and consumers alike.

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