Notes: Corporate Governance

Unit-1: Conceptual Framework of Corporate

Governance
1. Corporate Governance: Meaning, Significance, and
Principles
Meaning of Corporate Governance:

Corporate Governance refers to a system of rules, practices, and processes by which a company is directed and
controlled. It ensures accountability, fairness, and transparency in a company’s relationship with its
stakeholders, including shareholders, customers, employees, government, and society.

Significance of Corporate Governance:

1. Enhances Investor Confidence – Good corporate governance ensures transparency and accountability,
which helps attract investors.
2. Improves Corporate Performance – Proper governance mechanisms lead to better decision-making
and efficiency.
3. Protects Stakeholder Interests – It balances the interests of various stakeholders, preventing
exploitation.
4. Minimizes Corporate Risks – Governance helps in identifying, assessing, and mitigating risks
effectively.
5. Legal Compliance – Ensures adherence to legal and regulatory requirements, avoiding penalties and
reputational damage.
6. Promotes Ethical Business Practices – Encourages ethical conduct and reduces fraudulent activities.
7. Facilitates Economic Growth – Well-governed firms contribute to national economic stability and
development.

Principles of Corporate Governance:

1. Accountability – Organizations must be accountable to stakeholders for their actions and decisions.
2. Transparency – Ensures timely disclosure of financial and operational information.
3. Fairness – Treating all stakeholders equitably and justly.
4. Responsibility – Management must act responsibly in the company’s best interest.
5. Independence – The Board of Directors should be independent to make objective decisions.
6. Ethical Conduct – Promotes integrity, honesty, and adherence to laws.
7. Stakeholder Interests – Recognizes and respects the rights of all stakeholders.

2. Management and Corporate Governance

Management refers to planning, organizing, leading, and controlling resources efficiently to achieve business
goals, whereas corporate governance ensures ethical decision-making and compliance with regulations. The two
work together to create a well-structured and responsible organization.

Key Differences:

 Management focuses on operational execution, while corporate governance sets the overall direction and
policies.
 Corporate governance ensures accountability, while management is responsible for daily business
decisions.
 Governance structures like the Board of Directors oversee management's performance.

3. Theories of Corporate Governance

1. Agency Theory:

 Developed by Michael Jensen and William Meckling (1976).

 Describes the relationship between principals (shareholders) and agents (managers).
 Issues arise when agents prioritize their interests over those of the principals.
 Solutions include performance-based incentives and monitoring mechanisms.

2. Stewardship Theory:

 Opposes agency theory, assuming managers are stewards who act in the best interest of shareholders.
 Managers are intrinsically motivated to work for the company’s success.
 Focuses on trust, loyalty, and long-term organizational performance.

3. Stakeholder Theory:

 Proposed by R. Edward Freeman (1984).

 Suggests that companies should consider the interests of all stakeholders, not just shareholders.
 Encourages businesses to be socially responsible.

4. Resource Dependency Theory:

 Introduced by Jeffrey Pfeffer and Gerald Salancik.

 Suggests that organizations depend on external resources and must manage relationships strategically to
ensure sustainability.
 The Board of Directors plays a crucial role in securing necessary resources.

5. Managerial Hegemony Theory:

 Proposed by John P. Kotter and James L. Heskett.

 Suggests that managers dominate corporate decision-making, leaving little power to the Board.
 Governance mechanisms like independent boards and shareholder activism help counter managerial
dominance.
4. Models of Corporate Governance
1. Anglo-American Model:

 Followed in the US, UK, Canada, and Australia.

 Focuses on shareholder interests.
 Board of Directors includes independent members to ensure transparency.

2. German Model:

 Features a two-tier board structure: Supervisory Board (oversight) and Management Board (execution).
 Employees and shareholders have representation in governance.

3. Japanese Model:

 Keiretsu (interlinked businesses) structure where banks and other firms hold significant stakes.
 Consensus-based decision-making involving multiple stakeholders.

4. Indian Model:

 Based on the Anglo-American model but influenced by government regulations.

 SEBI (Securities and Exchange Board of India) enforces governance norms.
 Independent directors and whistleblower policies are crucial components.

5. The Art of Governance as per Kautilya’s Arthashastra:

 Kautilya (Chanakya), in his Arthashastra (4th century BCE), outlined governance

principles for rulers, many of which apply to modern corporate governance.
 Key principles include:
1. Dharma (Ethical Conduct) – Ensuring ethical and fair leadership.
2. Leadership Accountability – A ruler (or CEO) must act in the people's
(stakeholders’) best interest.
3. Strategic Resource Management – Efficient allocation of financial and
human resources.
4. Risk Management – Identifying and mitigating risks proactively.
5. Transparency in Administration – Leaders must be transparent in decision-
making and operations.

Relevance in Modern Corporate Governance:

 Encourages ethical leadership.

 Focuses on strategic management and accountability.
 Advocates for stakeholder welfare over personal gains.
 Highlights the importance of surveillance and audits to prevent corruption.

Conclusion:
Corporate governance ensures companies operate efficiently, ethically, and in compliance
with regulations. Different governance theories and models provide various perspectives
on managing corporate entities. Ancient texts like Kautilya’s Arthashastra offer timeless
governance principles that remain relevant today. A well structured governance
framework fosters economic stability, investor confidence, and corporate responsibility.

Unit II: Recent Issues and Challenges of Corporate

Governance

Recent Issues and Challenges of Corporate Governance

1. Board Structure and Directors

Board of Directors (BoD) – Definition & Importance

 The Board of Directors is the governing body of a company responsible for setting
corporate policies, making strategic decisions, and overseeing management.
 A well-structured board ensures transparency, accountability, and protection of
shareholder interests.

Types of Board Structures

1. Single-tier Board System

o The board consists of both executive and non-executive directors.
o Common in countries like the U.S. and the U.K.
o Ensures quicker decision-making but may lead to conflicts of interest.
2. Two-tier Board System
o Separates the Supervisory Board (non-executive) from the Management
Board (executive directors).
o Common in Germany, Netherlands, and some European countries.
o Provides better checks and balances but slows down decision-making.

Types of Directors and Their Roles

1. Executive Directors:
o Involved in daily business operations.
o Examples: CEO, CFO, COO.
2. Non-Executive Directors (NEDs):
o Not involved in daily operations but provide independent oversight.
o Bring expertise and an unbiased perspective.
3. Independent Directors:
o No financial, business, or personal relationships with the company.
 oEnsure impartial decision-making and protect minority shareholders.
4. Nominee Directors:
o Appointed by large shareholders or financial institutions.
o Represent the interests of the appointing entity.

2. Role of the Board of Directors

Primary Functions of the Board

1. Strategic Direction – Sets long-term goals and corporate policies.

2. Corporate Oversight – Ensures management acts in the best interest of
stakeholders.
3. Risk Management – Identifies and mitigates financial, operational, and
reputational risks.
4. Financial Oversight – Reviews budgets, financial reports, and compliance with
regulations.
5. Ethical Governance – Encourages transparency, integrity, and corporate social
responsibility (CSR).
6. Shareholder Protection – Ensures fair treatment of all shareholders, including
minority shareholders.

Challenges in Board Governance

 Lack of independence among board members.

 Conflicts of interest between management and shareholders.
 Inadequate diversity in board composition.

3. Board Committees and Their Functions

Board committees help the board focus on specialized areas of governance.

Key Committees:

1. Audit Committee
o Ensures financial reporting is accurate and complies with regulations.
o Reviews internal and external audit reports.
o Composed mainly of independent directors for unbiased decision-making.
2. Nomination and Remuneration Committee
o Selects board members and senior executives.
 oSets compensation and performance-linked incentives.
3. Risk Management Committee
o Identifies potential risks (financial, legal, operational).
o Implements policies to mitigate these risks.
4. CSR Committee
o Ensures compliance with Corporate Social Responsibility (CSR) policies.
o Monitors spending on social projects like education, healthcare, and
environment.
5. Stakeholders’ Relationship Committee
o Addresses grievances of shareholders, investors, and customers.
o Ensures transparent communication with stakeholders.

4. Insider Trading

Definition

Insider trading is the buying or selling of company shares based on confidential, non-
public information.

Why is Insider Trading Illegal?

 It creates an unfair advantage for insiders (like executives and directors).

 It reduces investor confidence in stock markets.
 It violates corporate ethics and transparency norms.

Regulations and Prevention

 SEBI (Securities and Exchange Board of India) and SEC (U.S. Securities and
Exchange Commission) regulate insider trading.
 Companies implement trading windows to restrict buying/selling shares by
insiders at certain times.

5. Whistle-Blowing

Definition

Whistle-blowing refers to an employee or stakeholder reporting unethical, illegal, or

fraudulent activities within an organization.
Types of Whistle-blowing:

1. Internal Whistle-blowing – Reporting misconduct to the company’s internal

authorities.
2. External Whistle-blowing – Reporting misconduct to government agencies,
media, or regulators.

Importance of Whistle-blowing in Corporate Governance

 Helps detect fraud and financial mismanagement.

 Enhances corporate transparency.
 Protects shareholders and stakeholders.

Challenges Faced by Whistleblowers

 Fear of retaliation or job loss.

 Lack of legal protection in some jurisdictions.

Regulatory Protection

 Many countries have whistleblower protection laws (e.g., Whistleblower

Protection Act in the U.S., SEBI regulations in India).

6. Shareholder Activism

Definition

Shareholder activism is when investors use their rights to influence corporate policies
and management decisions.

Methods of Shareholder Activism

1. Proxy Voting – Shareholders vote on key issues like executive pay and board
appointments.
2. Public Campaigns – Using media to expose governance failures.
3. Legal Action – Filing lawsuits against management for mismanagement or fraud.

Role of Institutional Investors

 Institutional investors like mutual funds, pension funds, and hedge funds have
significant influence over corporate governance.
  They demand higher accountability and ethical business practices from
companies.

7. Class Action Suits

Definition

A class action suit is a lawsuit filed by a group of investors or shareholders against a

company for corporate misconduct.

Common Reasons for Class Action Suits

 Financial fraud and misrepresentation.

 Violation of shareholder rights.
 Environmental damage or unethical business practices.

Example:

In the U.S., companies like Enron and WorldCom faced class action lawsuits for
fraudulent accounting practices.

8. CSR and Corporate Governance

Definition of CSR

Corporate Social Responsibility (CSR) refers to a company’s voluntary commitment to

ethical, social, and environmental responsibilities.

CSR and Corporate Governance Connection

 Ethical corporate governance ensures that CSR funds are spent effectively and
transparently.
 CSR initiatives enhance a company’s reputation and strengthen stakeholder
trust.

CSR Mandates in India

 The Companies Act, 2013 requires companies to spend 2% of their net profits
on CSR activities.
  CSR activities include education, healthcare, environmental protection, and
rural development.

9. Concept of Gandhian Trusteeship

Definition

The Gandhian Trusteeship Model promotes ethical business practices where wealthy
individuals and businesses act as "trustees" of their wealth for the welfare of
society.

Principles of Gandhian Trusteeship

1. Business as a Social Trust – Companies should act in the public interest.

2. Fair Wealth Distribution – Profits should benefit all stakeholders, not just
owners.
3. Ethical Business Practices – Honesty, transparency, and accountability should be
upheld.

Relevance in Modern Corporate Governance

 Encourages sustainable business models.

 Supports environmental, social, and governance (ESG) investing.
 Aligns with stakeholder capitalism, where businesses focus on long-term societal
welfare.

Conclusion

Corporate governance is essential for ensuring ethical, transparent, and sustainable

business practices. Challenges like insider trading, shareholder activism, and
whistleblowing highlight the need for strong regulatory frameworks. Concepts like
Gandhian Trusteeship and CSR provide an ethical foundation for businesses to
contribute to society.

Unit-3: Global Corporate Failures and International

Codes
Global Corporate Failures and International Codes
Corporate failures occur due to fraud, poor governance, financial mismanagement, and
unethical practices. Such failures have led to regulatory reforms and the development of
corporate governance standards worldwide.

1. Major Global Corporate Failures

1.1 BCCI (Bank of Credit and Commerce International) – United Kingdom (1991)

🔹 Background:

 Founded in 1972, BCCI became one of the largest international banks.

 Operated in over 70 countries with assets exceeding $20 billion.

🔹 Reasons for Failure:

 Massive fraud and money laundering – The bank engaged in illegal activities like tax
evasion, arms trafficking, and bribery.
 Weak regulatory oversight – BCCI operated in multiple jurisdictions, making it
difficult to regulate.
 False financial statements – The bank concealed its losses for years.

🔹 Consequences:

 The Bank of England shut it down in 1991.

 Losses of over $10 billion for investors and depositors.

🔹 Lessons Learned:

 Need for global banking regulations.

 Improved transparency and anti-money laundering laws.

1.2 Maxwell Communications Corporation – United Kingdom (1991)

🔹 Background:

 A media and publishing giant owned by Robert Maxwell.

 Included newspapers like the Daily Mirror.

🔹 Reasons for Failure:

  Corporate fraud – Maxwell illegally used £440 million from employee pension funds
to cover business debts.
 Lack of oversight – No independent board monitoring his activities.
 Poor financial management – Excessive borrowing and financial misreporting.

🔹 Consequences:

 Maxwell’s sudden death in 1991 led to investigations.

 The company collapsed, and pensioners lost millions.

🔹 Lessons Learned:

 Stronger corporate governance and pension fund regulations.

 Need for external audits and board independence.

1.3 Enron – USA (2001)

🔹 Background:

 Once a top energy company in the U.S.

 Reported $100 billion in revenues before its collapse.

🔹 Reasons for Failure:

 Accounting fraud – Used Special Purpose Entities (SPEs) to hide debt.

 Misleading financial reporting – Showed fake profits to attract investors.
 Collusion with auditors (Arthur Andersen) – Manipulated financial reports.

🔹 Consequences:

 Filed for bankruptcy in 2001 – Largest corporate collapse in U.S. history at the time.
 Shareholders lost $74 billion.
 Arthur Andersen (auditor) was shut down for its role in the fraud.

🔹 Lessons Learned:

 Led to the Sarbanes-Oxley Act (SOX) 2002 to strengthen corporate governance.

 Importance of audit independence and whistle-blower protection.

1.4 WorldCom – USA (2002)

🔹 Background:
  A major telecommunications company in the U.S.
 Grew rapidly through acquisitions.

🔹 Reasons for Failure:

 Accounting fraud – Overstated revenues by $11 billion.

 Manipulation of expenses – Recorded operational costs as investments to boost profits.
 Lack of internal controls – Senior executives abused their power.

🔹 Consequences:

 Filed for bankruptcy in 2002 (largest U.S. bankruptcy at the time).

 CEO Bernard Ebbers sentenced to 25 years in prison.

🔹 Lessons Learned:

 Led to SOX 2002 reforms.

 Strengthened internal controls and financial disclosure laws.

1.5 Vivendi – France (2002)

🔹 Background:

 French multinational involved in media, telecommunications, and utilities.

 Rapidly expanded through mergers and acquisitions.

🔹 Reasons for Failure:

 Over-expansion and high debt – Took on excessive debt from acquisitions.

 Financial mismanagement – CEO Jean-Marie Messier manipulated financial reports.
 Weak internal governance – The board failed to monitor risky decisions.

🔹 Consequences:

 Shareholders lost billions in value.

 CEO Messier was removed and fined for misleading investors.

🔹 Lessons Learned:

 Need for financial discipline and debt management.

 Stronger shareholder rights and corporate transparency.

1.6 Lehman Brothers – USA (2008)

🔹 Background:

 A leading investment bank in the U.S.

 Major player in the subprime mortgage market.

🔹 Reasons for Failure:

 Excessive risk-taking – Invested heavily in subprime mortgages.

 Leverage and debt mismanagement – Borrowed heavily to finance risky assets.
 Accounting manipulation (Repo 105) – Hid debt to appear financially strong.

🔹 Consequences:

 Bankruptcy in 2008 – Largest collapse in U.S. history.

 Triggered the global financial crisis.

🔹 Lessons Learned:

 Led to Dodd-Frank Act (2010) for financial sector regulation.

 Stricter risk management and financial disclosure norms.

2. International Corporate Governance Codes and Reforms

2.1 Sir Adrian Cadbury Committee (UK, 1992)

 Issued the "Cadbury Report", the first major corporate governance guideline.
 Recommended:
o Board independence – At least some directors should be independent.
o Audit committees – To oversee financial reporting.
o Shareholder rights protection.

Impact:

 Influenced corporate governance frameworks globally, including India’s SEBI Listing

Regulations.

2.2 Sarbanes-Oxley Act (SOX, USA, 2002)

 Enacted after Enron and WorldCom scandals.

 Key provisions:
o CEO/CFO accountability – They must certify financial statements.
o Audit independence – Banned auditors from consulting for clients.
 o Whistle-blower protection – Encourages reporting fraud.

Impact:

 Strengthened corporate transparency and financial accountability.

2.3 OECD Principles of Corporate Governance (1999, Revised 2015)

 Set global standards for corporate governance.

 Six key principles:
1. Shareholder rights and equitable treatment.
2. Role of stakeholders in governance.
3. Transparency and disclosure.
4. Responsibilities of the board.
5. Ethical behavior and integrity.
6. Risk management and internal controls.

Impact:

 Used by governments to strengthen governance laws.

 Encouraged better corporate ethics and disclosure practices.

Conclusion
Corporate failures highlight the importance of strong governance, transparency, and ethical
practices. Each failure led to significant reforms, such as the Cadbury Report, SOX Act,
and OECD guidelines. Today, companies must follow strict governance norms to prevent
fraud and protect shareholders.

Unit-4: Corporate Governance Regulatory

Framework in India

Corporate Governance Regulatory Framework in India

India has developed a robust corporate governance framework to enhance transparency, accountability,
and investor protection. Various committees and regulatory bodies like SEBI (Securities and Exchange
Board of India) and MCA (Ministry of Corporate Affairs) play a crucial role in shaping governance laws.
1. Key Corporate Governance Committees in India
1.1 Kumar Mangalam Birla Committee (1999) – SEBI's First Step

🔹 Objective:

 To enhance corporate governance practices in listed companies.

 Recommended Clause 49 in the Listing Agreement, which laid the foundation for corporate governance
in India.

🔹 Key Recommendations:

 Board of Directors
o Minimum 50% independent directors if the chairman is an executive director.
 Audit Committee
o Must have at least three directors, with a majority of independent directors.
 Disclosure & Transparency
o Listed companies must disclose their financials, risks, and management discussions.
 Shareholder Rights
o Minority shareholders must have protection and voting rights.

🔹 Impact:

 First step toward mandatory corporate governance norms in India.

 Led to SEBI’s Clause 49, later incorporated in the Companies Act, 2013.

1.2 NR Narayana Murthy Committee (2005) – Strengthening Clause 49

🔹 Objective:

 Improve corporate governance in listed companies by enhancing transparency and accountability.

🔹 Key Recommendations:

 More Independence for the Board

o At least 50% independent directors for listed companies.
 Separation of Chairman and CEO roles
o To ensure better accountability.
 Whistleblower Mechanism
o Encouraging employees to report unethical practices.
 Stronger Audit Committees
o Audit committees must review related-party transactions and financial risks.

🔹 Impact:

 Strengthened Clause 49 of SEBI’s Listing Agreement.

 Introduced whistleblower policies and increased independent director requirements.
2. Companies Act, 2013 – The Backbone of Corporate Governance
The Companies Act, 2013 replaced the Companies Act, 1956 and introduced modern corporate governance
principles.

🔹 Key Provisions:

(i) Board of Directors

 At least one woman director in certain classes of companies.

 At least one-third independent directors for listed companies.

(ii) Audit Committee & Nomination Committee

 Audit committees to have a majority of independent directors.

 Nomination committees to oversee appointments and remuneration.

(iii) Corporate Social Responsibility (CSR)

 Companies with a net profit of ₹5 crore+ must spend 2% of their profits on CSR.
 CSR spending must be disclosed in annual reports.

(iv) Whistleblower Protection

 Mandatory Vigil Mechanism to allow employees to report misconduct.

(v) Stringent Disclosure Norms

 Companies must disclose related-party transactions, financial statements, and board meetings.

🔹 Impact:

 Strengthened shareholder protection and corporate transparency.

 Made CSR spending mandatory, making India one of the few countries with such a provision.

3. SEBI (LODR) Regulations, 2015 – Enhancing Transparency

The Listing Obligations and Disclosure Requirements (LODR), 2015, introduced stronger corporate
governance norms for listed companies.

🔹 Key Provisions:

1. Composition of the Board

o At least 50% independent directors if the Chairman is an executive.
o At least one woman director on the board.
2. Audit and Risk Management Committees
o Audit committees must review financial reports and compliance with SEBI regulations.
o Risk management committees must oversee business risks.
 3. Disclosure & Transparency
o Companies must disclose quarterly financial results, voting patterns, and related-party
transactions.
4. Corporate Governance Reporting
o Companies must submit a Corporate Governance Report to SEBI.

🔹 Impact:

 Made financial disclosures more transparent.

 Increased accountability of promoters and management.

4. Uday Kotak Committee (2017) – Raising Governance Standards

🔹 Objective:

 Strengthen corporate governance in listed companies.

🔹 Key Recommendations:

 Independent Directors:
o At least 50% independent directors for listed companies.
o Minimum 6 directors on the board of large companies.
 Separation of Roles:
o Chairman and CEO should be separate for better accountability.
 Enhanced Disclosures:
o Disclose loan defaults, related-party transactions, and auditor resignations.
 Strengthened Whistleblower Protections:
o Mandatory whistleblower policy in companies.

🔹 Impact:

 SEBI adopted most recommendations, strengthening board independence and corporate disclosures.

5. Comparison of Key Corporate Governance Reforms in India

Committee / Law Year Major Contribution
Kumar Mangalam Birla
1999 Introduced Clause 49, Board independence, Audit committees
Committee
Narayana Murthy Committee 2005 Strengthened Clause 49, whistleblower policy, independent directors
Companies Act, 2013 2013 Mandatory CSR, independent directors, whistleblower protection
Quarterly disclosures, risk management, corporate governance
SEBI (LODR) Regulations 2015
reports
Stronger independent director rules, separation of CEO &
Uday Kotak Committee 2017
Chairman roles
Conclusion
India’s corporate governance framework has evolved significantly through:
✅ SEBI’s regulations (LODR 2015)
✅ Companies Act, 2013
✅ Reforms by various committees (Birla, Murthy, Kotak)

The focus remains on transparency, accountability, and protecting investor interests. Strong governance
ensures long-term sustainability and trust in corporate India.

Unit-5: Corporate Failures and Scams in India

Corporate Failures and Scams in India

Corporate failures in India often result from fraud, mismanagement, weak regulatory oversight, and poor
corporate governance. These scandals have shaken investor confidence and led to stricter laws and
reforms.

1. Major Corporate Failures in India

1.1 Satyam Computer Services Ltd. (2009) – India’s Enron

🔹 Background:

 Satyam was India’s 4th largest IT company, led by Ramalinga Raju.

 Listed on the BSE, NSE, and NYSE.

🔹 Scam Details:

 Manipulated financial statements – Inflated revenue and profits by ₹7,800 crore.

 Fake bank balances – Created false cash reserves to mislead investors.
 Corporate governance failure – Weak audit oversight (PwC was the external auditor).

🔹 Consequences:

 Share price crashed by 77%, wiping out investor wealth.

 Ramalinga Raju was arrested, and Satyam was acquired by Tech Mahindra.

🔹 Lessons Learned:

 Led to the introduction of Stricter audit regulations (Companies Act, 2013).

 Highlighted the need for stronger board oversight.
1.2 Kingfisher Airlines (2012) – A Debt-Fueled Failure

🔹 Background:

 Launched by Vijay Mallya in 2005 as a luxury airline.

 Once India’s second-largest airline.

🔹 Reasons for Failure:

 Excessive debt – Borrowed over ₹9,000 crore from Indian banks.

 Poor financial management – High operational costs and unsustainable pricing.
 Corporate governance issues – Funds diverted from Kingfisher Airlines to other UB Group businesses.

🔹 Consequences:

 Kingfisher shut down in 2012, leaving banks with massive NPAs (Non-Performing Assets).
 Vijay Mallya fled India in 2016 and is currently facing extradition.

🔹 Lessons Learned:

 Need for stronger lender due diligence.

 Led to strict loan recovery mechanisms (IBC, 2016).

1.3 Punjab National Bank (PNB) Heist (2018) – ₹14,000 Crore Scam

🔹 Background:

 The scam involved jewelry businessmen Nirav Modi and Mehul Choksi.
 PNB employees issued fraudulent Letters of Undertaking (LoUs) to obtain loans from foreign banks.

🔹 Scam Details:

 PNB employees bypassed core banking systems, issuing fake guarantees.

 ₹14,000 crore was fraudulently borrowed without proper collateral.

🔹 Consequences:

 PNB suffered huge financial losses.

 Nirav Modi and Mehul Choksi fled India.
 Several PNB officials were arrested.

🔹 Lessons Learned:

 Tighter banking controls and SWIFT transaction monitoring.

 Led to stricter RBI regulations on LoUs and trade finance.

1.4 IL&FS Group Crisis (2018) – A Shadow Banking Disaster

🔹 Background:

 IL&FS (Infrastructure Leasing & Financial Services) was a major NBFC (Non-Banking Financial
Company).
 Had over ₹91,000 crore in debt.

🔹 Reasons for Failure:

 Massive financial mismanagement – Borrowed heavily without repayment capacity.

 Lack of transparency – Fake financial reports misled investors and regulators.
 Regulatory oversight failure – Weak governance allowed unchecked risk-taking.

🔹 Consequences:

 Defaults triggered panic in India’s financial markets.

 Government took over IL&FS and restructured its debt.

🔹 Lessons Learned:

 Led to better monitoring of NBFCs by RBI.

 Stricter credit rating and risk assessment norms.

1.5 ICICI Bank Loan Scandal (2018) – Conflict of Interest

🔹 Background:

 Involved ICICI Bank CEO Chanda Kochhar.

 Allegations of quid pro quo with Videocon Group.

🔹 Scam Details:

 ICICI sanctioned a ₹3,250 crore loan to Videocon, which later turned into an NPA.
 Chanda Kochhar’s husband received financial benefits from Videocon in return.

🔹 Consequences:

 Chanda Kochhar was forced to resign and arrested.

 ICICI Bank’s governance structure was criticized.

🔹 Lessons Learned:

 Stronger conflict of interest regulations for top executives.

 Led to better disclosure norms for bank lending.

1.6 Yes Bank Crisis (2020) – Poor Risk Management

🔹 Background:
  Once India’s fastest-growing private bank, led by Rana Kapoor.

🔹 Reasons for Failure:

 Lending to high-risk borrowers – Over ₹30,000 crore of bad loans.

 Manipulated financial statements – Concealed NPAs.
 Lack of internal controls – CEO had unchecked power.

🔹 Consequences:

 RBI took control of Yes Bank and imposed a moratorium on withdrawals.

 SBI and other banks infused capital to rescue Yes Bank.

🔹 Lessons Learned:

 Stricter risk management norms for private banks.

 RBI increased supervision of bank lending practices.

2. Common Governance Problems in Corporate Failures

Governance Issue Examples
Financial Fraud & Misreporting Satyam, IL&FS, Enron, PNB Scam
Excessive Debt & Poor Risk Management Kingfisher, Yes Bank, Lehman Brothers
Conflict of Interest & Insider Trading ICICI Bank, Maxwell, WorldCom
Weak Board Oversight Satyam, IL&FS, Yes Bank
Regulatory Lapses PNB Scam, IL&FS, BCCI

🔹 Key Takeaways:

 Strong internal controls and audit committees are necessary.

 Regulatory agencies (RBI, SEBI) must enforce stricter monitoring.
 Ethical leadership is critical for preventing corporate fraud.

Conclusion
Corporate failures in India highlight weak governance, fraud, excessive risk-taking, and lack of oversight.
These cases have led to significant regulatory reforms, including:
✅ Companies Act, 2013 – Stronger disclosure norms.
✅ SEBI’s stricter listing regulations – Increased transparency.
✅ Insolvency and Bankruptcy Code (IBC), 2016 – Faster debt recovery.