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

Abstract

AbstractOne 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.KeywordsCorporate governanceCorporate fraudBanking fraud