How Satyam scam raised the bar of corporate governance

K V Kurmanath Hyderabad | Updated on January 23, 2018 Published on April 09, 2015


Experts say govt brought in changes to ensure transparency, accountability

Call it coincidence or paradox, but a couple of months before the Satyam scam became public, the World Council for Corporate Governance picked the IT firm for the Golden Peacock Global Award for excellence in Corporate Governance… when , in fact, it stands out as an example how not to run a firm.

The scam brought to focus multiple flaws in corporate governance practices -- unethical conduct, fraudulent accounting, dubious role of auditors, ineffective board, failure of independent directors and non-disclosure of pledged shares.

Subsequently, the Minister of Corporate Affairs introduced a warning system that can pick up signals from companies that are deviating from the rules and the Government brought in changes in the Companies Act in 2013, introducing a slew of measures to ensure transparency and accountability in corporate affairs.“In a way the Satyam episode helped. Several changes have been brought in… new Act introduced several measures to ensure better corporate governance practices,” KN Murthy, a senior Chartered Accountant, who has studied the case in depth, said.

The new Companies Act require at least one-third of the Board as Independent Directors (as opposed to Clause 49 of Listing Agreement that called for more) with tenure of initial 5 years and receives only fee and not stock options.

“Thanks to Satyam again (which wanted to buy the two Maytas firms owned by promoters’ kin), the new Act introduced strict norms on related party deals. This is a welcome step. This should go a long way in bringing in transparency to such transactions,” he said.

“So also class action suit provision. It empowers minority shareholders and protects their interests,” he said.

Focus on compliance

Sudheendhra Putty, Company Secretary of Cyient, has said that the new Act focuses on compliance.

“Section 92 of the Act provides that annual return prepared by companies must have disclosures regarding matters related to certification of compliance and disclosures.

“They deal with related party transactions, inter-corporate loans, investments, guarantees and conduct of postal ballot,” he said.

Onus on Directors

The directors are supposed to have devised a proper system to ensure compliance as they prepare the Board’s report, conforming to all applicable laws. “It will be a function of the company secretary to report to the board about compliance with the provisions of the Act and other laws applicable,” he said.

An important norm was compulsory dematerialisation of promoter holdings to ensure transparency in the dealings of shares by promoters, especially pledge or usage as collateral and its subsequent disclosure.

The SEBI made it mandatory to rotate individual auditors after five years and audit firms after 10 years to improve the quality of financial reporting, detect any oversight and ensure independence of auditors in the true sense.

The SEBI also directed the monitoring cell established by stock exchanges to ascertain the adequacy and accuracy of disclosures made in the quarterly compliance reports received from companies acts as a counter check. Companies were asked to compulsorily devise a whistle blower policy and affirming that no personnel has been denied access to the audit committee helps free communication of concerns about illegal/unethical practices.

with inputs from Mumbai bureau

Published on April 09, 2015
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