Financial reporting fraud including deliberate falsification of values and non-disclosure induces information risks along with serious quarrels amongst the stakeholders. When talking about investments, the investors usually prefer companies that have an effective corporate governance framework and non-counselling disclosures. While this is accurate, it is precarious when the management is acquiescent to break the laws to boost their paychecks. In this context, we will review various corporate failures of 2018 and incorporate certain lessons learned from them.
To begin with, January witnessed the collapse of Carillion, which was pure capitalism in action. The company, headquartered in Wolver Hampton, United Kingdom, filed for compulsory liquidation after losing money on big contracts, as well as racking up unsustainable debts totalling around £1.5 billion. Even though the company took actions to safeguard them from financial risks, the bank pulled the plug. The lessons inferred from this case are: there is a need to rethink the company law to enforce the existing laws more strenuously, the government can have private finance initiative or policies to reduce expenditure, but not both.
The beginning of February was marked by the emergence of the PNB fraud (probably the largest banking fraud in the history of India). PNB employees issued fake Letter of Undertakings. Since 2011,1590 LoUs were issued to Nirav Modi and 41,178 were distributed as a whole. Based on the fake LoUs distributed, the employees misused the SWIFT network to transmit messages to Allahabad Bank and Axis Bank for fund requirement, these transactions never made it to the bank’s core system. As a result, RBI banned LoUs as a whole. The lessons learnt from this case are: Institutions must act in accordance to the rule book i.e. if the customers founder to repay their dues within a specified period of time, the bank is obligated to pay the counterparty bank, cases of fraud should not be inspected in isolation, recognizing the systematic problems and following adequate measures to resolve them.
July advanced the Sahara-SEBI case, optionally fully convertible debentures were issued by two companies of Sahara, to which, SEBI claimed its jurisdiction and alleged that Sahara didn’t take any permission for them. As a consequence, Sahara had to make double payments for a single liability. Lessons comprehended from this case are: concealing activities are not ethical and unlicensed issuing would only cause debt for the company even if it prospers in the short run.
The conflict between Tata and Cyrus Mistry re-emerged in August. Mistry, former executive chairman of Tata, accused Tata sons of oppression against minority shareholders and also alleged that his removal was not in accordance with the Companies Act. He also affirmed rampant mismanagement of affairs and declared that corruptive practices were being followed that is causing massive revenue loss. ROC of a region in Mumbai in an RTI reply said Tata violated the Companies Act, RBI rules and more importantly, Tata’s’ own articles of association (AoA). The message put forward by this case is that there is a need for corporate as well as a personal relationship at the top-level, companies should perform in accordance with the guidelines laid down in the Companies Act.
September observed the IL&FS scam. The primary task of IL&FS is risk assessment but the risk management team failed to meet over the last 4 years. In July, IL&FS transport delayed 450 crores payment to SIDBI due to which ICRA and CARE started downgrading its ratings. At present, the group is reeling under a huge outstanding debt of Rs. 91,000 crore which it plans to repay by selling its assets. Learning’s from this incident are: transparency and full disclosure hold utmost importance and risk assessment should be treated as the focal point in an organisation’s functioning.
The RBI-Government spat also came forward in September. Here, Jaitley stated that there were differences with the RBI regarding credit flow in the economy and liquidity support, he added that the government had initiated a “discussion” to communicate its apprehensions. He asserted that the RBI’s policies need to be in sync with the economic policies. Furthermore, according to him, if the government were failing to convey the difficulties in the system, it would be failing in its duties. Recently, RBI was also accused of maintaining its CRR at 9% domestically when it should have been 5.5% and the bank held 29% of the capital assets when it was required to hold only 18%. The harmony between the central government and various autonomous institutions by ensuring coordinated practices has been highlighted through this case.
September also brought in light the Yes Bank Scam. Atul Mishra, a Yes Bank business relationship manager, was arraigned for helping the owners of a Noida-based firm. The Noida- based firm perpetrated Rs3, 700 crores online trading scam. ICRA emphasized that these developments will adversely affect Yes Bank’s ability to raise capital that contrarily represented one of the key credit strengths of the bank. The letter by ICRA also affirmed the window-dressing of various corporate accounts to conceal the actual non-performing assets of the bank. The lessons from this episode are that data validation should be actively conducted and there is a need for proper and unbiased auditing. Hence, an external auditor must conduct auditing.
The conflicts in JM Financial ARC in November underlined the need for unification amongst the numerous independent directors. After a year-long struggle between the board’s independent directors and the promoter over a wide range of issues, Anil Khandelwal and H.N. Sinor’s resigned.
Another event that surfaced in November was the Nissan-Renault-Mitsubishi revelations. Herein Nissan’s Carlos Ghosn was accused of incorrectly reporting his compensation over a period of years, leveraging a company investment fund for personal use and inappropriately filing expense reports. Learnings from this case are that there is a need for an adequate number of members on the board, proper auditing of the board members and frequent assessment of the company’s financial statements.
The end of November attracted the Sun Pharma misreporting. In the Sun Pharma episode, there was a lack of disclosure around the number of parties receiving the loan, improper management and erroneous lending worth Rs. 2242 crores. After a whistle-blower wrote a detailed report to SEBI about these happenings. The shares of Sun Pharma fell. A promoter group company of Sun Pharma, Virtuous Finance Pvt. Ltd also came under scanner for lending to Ketan Parekh. Reports shall be audited by an independent external auditor to avoid any misguiding and transparency in a company’s functioning and from where it is raising funds to ensure ethical behaviour is the lesson learned through this case.
Most of the episodes described in this report are from India, delineating the fact that corporate governance framework in India is not yet efficacious. Malaysia, on the other hand, progressed and accelerated from number 7 to 4 in CG standards in Asia because of good governance practices, implicating how through transparency, disclosure, regulation and verification India can attain the same position.